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Stock market risk in the financial crisis

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  • Grout, Paul A.
  • Zalewska, Anna

Abstract

In this paper, we look at the effect of the financial crisis from an angle overlooked to date in the finance literature by investigating composition effects arising from the financial crisis. A composition effect is a change in the market risk of a sector that is caused not by a direct change in that sector but by a change in another sector that affects the composition of the stock market. In the paper we investigate the pre and during crisis market risk of the industrial, banking and utilities sectors. Amongst other results, we find a positive relationship across the G12 countries between the increase in the market risk of industrials during the crisis and both the pre-crisis market risk of the banking sector and the scale of the systemic crisis in a country. The six G12 countries that experienced a major systematic banking crisis are amongst the seven countries with the largest increases in the market risk for industrials. Results drawn from our detailed analysis using US data are consistent with these findings. Finally, we show how the results add to our understanding of the linkages between the financial and real sector and conclude that composition effects of the financial crisis could have a significant chilling effect on investment in industrials, which is in addition to the effect of other linkages already documented.

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  • Grout, Paul A. & Zalewska, Anna, 2016. "Stock market risk in the financial crisis," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 326-345.
    • Handle: RePEc:eee:finana:v:46:y:2016:i:c:p:326-345
    DOI: 10.1016/j.irfa.2015.11.012
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    More about this item

    Keywords

    Financial crisis; Systemic risk; Market risk; Utilities; Banking sector; Industrials;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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