Visualizing Stock Market Risk: 7/1926 to 6/2015

///Visualizing Stock Market Risk: 7/1926 to 6/2015

Visualizing Stock Market Risk: 7/1926 to 6/2015

By |2017-08-18T16:52:55+00:00August 28th, 2015|Uncategorized|

How crazy is current market action?

Not that crazy.

…and if you lived through 2008, definitely not that crazy.

Seeing a -3%+ or a +3% observation is roughly a 1/100 event, or ~ 2.5 times a year. Obviously, return events are not independent and volatility tends to cluster, but the numbers above establish a basic starting point for discussions about daily return action.

Here we present daily total return data from the Ken French library:

  • Value-weight return of all CRSP firms incorporated in the US and listed on the NYSE, AMEX, or NASDAQ that have a CRSP share code of 10 or 11 (essentially ordinary common shares).

There are 23,509 daily return in total.

Daily Return Distribution:

Microsoft Excel - Histogram of CRSP Daily VW Returns.xlsm_2015-08-27_14-28-19

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Here are the specific stats:

BucketObservationsFrequencyCumulative
Less than -5.00%590.25%0.25%
-4.50%200.09%0.34%
-4.00%310.13%0.47%
-3.50%460.20%0.66%
-3.00%850.36%1.03%
-2.50%1640.70%1.72%
-2.00%2891.23%2.95%
-1.50%5472.33%5.28%
-1.00%11544.91%10.19%
-0.50%256610.91%21.10%
0.00%559923.82%44.92%
0.50%704829.98%74.90%
1.00%341614.53%89.43%
1.50%13315.66%95.09%
2.00%5632.39%97.49%
2.50%2371.01%98.49%
3.00%1150.49%98.98%
3.50%690.29%99.28%
4.00%610.26%99.54%
4.50%370.16%99.69%
5.00%190.08%99.77%
More than 5.00%530.23%100.00%

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

How about drawdowns?

Daily returns are one thing–let’s review the top 40 stock market drawdowns over the past 90+ years.

  • VW CRSP = Value-weight CRSP universe of AMEX, NYSE, and Nasdaq stocks (Basically S&P 500).
  • LTR = 10-Year Total Return

Monthly returns, gross of fees, total returns (e.g., including dividends).

RankDate StartDate EndVW_CRSPLTR
18/30/19296/30/1932-83.67%14.29%
210/31/20072/28/2009-50.37%20.55%
32/27/19373/31/1938-49.18%0.22%
412/31/19729/30/1974-46.46%-6.05%
58/31/20009/30/2002-45.09%33.46%
611/30/19686/30/1970-33.56%-8.02%
78/31/198711/30/1987-29.91%2.55%
88/31/19322/28/1933-28.47%0.88%
94/30/19404/30/1942-27.62%6.99%
105/31/19465/29/1947-23.85%1.04%
1112/31/19616/30/1962-23.06%3.97%
121/31/19347/31/1934-18.34%6.59%
138/31/193310/31/1933-17.95%-0.68%
144/30/20119/30/2011-17.71%9.44%
156/30/19988/31/1998-17.39%3.70%
165/31/199010/31/1990-16.97%3.59%
1711/30/19807/31/1982-16.62%17.87%
181/31/19669/30/1966-15.45%-0.18%
197/31/195712/31/1957-14.95%8.86%
2012/31/19384/29/1939-14.33%3.87%
214/30/20106/30/2010-12.99%4.68%
221/31/19803/31/1980-11.98%-7.67%
238/31/197810/31/1978-11.95%-3.04%
245/28/194811/30/1948-10.88%-0.08%
256/30/19835/31/1984-10.83%-2.59%
263/31/20005/31/2000-9.64%-0.10%
2712/31/19762/28/1978-9.33%-1.45%
287/31/19562/28/1957-8.37%-0.65%
298/31/19869/30/1986-8.15%-2.07%
303/31/19364/30/1936-8.02%0.35%
3112/31/195910/31/1960-7.97%11.44%
3212/31/19472/28/1948-7.94%0.66%
336/30/194311/30/1943-7.76%0.36%
341/31/19946/30/1994-7.60%-6.78%
3512/31/19891/31/1990-7.28%-1.99%
369/30/197910/31/1979-7.23%-8.41%
373/31/20125/31/2012-6.98%4.23%
3812/31/19528/31/1953-6.95%-1.66%
3912/31/19672/29/1968-6.89%2.94%
406/30/19999/30/1999-6.37%0.94%

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

And here are the numbers outlined on a chart:

top 40 drawdowns in the stock market

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

 

Clearly, if you can’t handle volatility, you shouldn’t be in the stock market.


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About the Author:

Wesley Gray, PhD
Wes Gray has published multiple academic papers and four books, including Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016).After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm that delivers affordable active exposures for tax-sensitive investors. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes currently resides in the suburbs of Philadelphia with his wife and three children.
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