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A perfect storm in the financial market

Author

Listed:
  • Chung, Chune Young
  • Hur, Seok-Kyun
  • Wang, Kainan

Abstract

This study provides a model explaining how small changes in asset prices may disrupt an entire financial market. Based on the capital asset pricing model (CAPM), our model implies that during a market crash, asset price changes affect the relative distribution of the CAPM betas of individual assets and force all tradable assets to co-move. Using US stock market data, our empirical results are consistent with the model’s predictions. Overall, the study aids understanding of the price patterns of assets during substantial market downturns, such as financial crises.

Suggested Citation

  • Chung, Chune Young & Hur, Seok-Kyun & Wang, Kainan, 2022. "A perfect storm in the financial market," Journal of Financial Stability, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finsta:v:61:y:2022:i:c:s1572308922000572
    DOI: 10.1016/j.jfs.2022.101034
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    References listed on IDEAS

    as
    1. Hur, Seok-Kyun & Chung, Chune Young, 2017. "Revisiting CAPM betas in an incomplete market: Evidence from the Korean stock market," Finance Research Letters, Elsevier, vol. 21(C), pages 241-248.
    2. Seok‐Kyun Hur & Chune Young Chung, 2019. "The Distribution Of Betas In Presence Of Nontraded Assets," Bulletin of Economic Research, Wiley Blackwell, vol. 71(1), pages 90-112, January.
    3. Kim, Moon K. & Zumwalt, J. Kenton, 1979. "An Analysis of Risk in Bull and Bear Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(5), pages 1015-1025, December.
    4. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    5. Fabozzi, Frank J & Francis, Jack Clark, 1977. "Stability Tests for Alphas and Betas over Bull and Bear Market Conditions," Journal of Finance, American Finance Association, vol. 32(4), pages 1093-1099, September.
    6. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
    7. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Capital asset pricing model; Beta distribution; Market crash; Financial crisis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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