A probit-based analysis of the deep stock market drawdowns

Damir Tokic and Dave Jackson

Journal of Economic Studies, 2023, vol. 51, issue 5, 993-1010

Abstract: Purpose - This study is motivated in part by the fact that the unfolding 2022 bear market, which has reached the −25% drawdown, has not been preceded by the inverted 10Y-3 m spread or an inverted near-term forward spread. Design/methodology/approach - The authors develop a three-factor probit model to predict/explain the deep stock market drawdowns, which the authors define as the drawdowns in excess of 20%. Findings - The study results show that (1) the rising credit risk predicts a deep drawdown about a year in advance and (2) the monetary policy easing precedes an imminent drawdown below the 20% threshold. Originality/value - This study three-factor probit model shows adaptability beyond the typical recessionary bear market and predicts/explains the liquidity-based selloffs, like the 2022 and possibly the 1987 deep drawdowns.

Keywords: Recession; Monetary policy; Deep drawdown (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-05-2023-0228

DOI: 10.1108/JES-05-2023-0228

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