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When a correction turns into a bear market: What explains the depth of the stock market drawdown? A discretionary global macro approach

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  • Damir Tokic

    (University of Texas Rio Grande Valley)

  • Dave Jackson

    (University of Texas Rio Grande Valley)

Abstract

In this article, we aim to explain what causes the depth of a stock market drawdown using the discretionary global macro approach. Our key finding is that the increase in credit risk to high/very high level after the beginning of a drawdown significantly explains the depth of the drawdown. An expected aggressive monetary policy tightening can trigger a correction, especially if accompanied with a high recession probability. Further, an expected aggressive monetary policy easing, as a sign of an imminent recession, can deepen the total drawdown. However, the depth of the total drawdown depends of whether the drawdown transitions to the ultimate credit crunch stage.

Suggested Citation

  • Damir Tokic & Dave Jackson, 2023. "When a correction turns into a bear market: What explains the depth of the stock market drawdown? A discretionary global macro approach," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 184-197, May.
    • Handle: RePEc:pal:assmgt:v:24:y:2023:i:3:d:10.1057_s41260-023-00306-3
    DOI: 10.1057/s41260-023-00306-3
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