Stock Market Risk in the Financial Crisis

Paul A. Grout, Anna Zalewska
2015 Social Science Research Network  
General rights This document is made available in accordance with publisher policies. Please cite only the published version using the reference above. Full terms of use are available: 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
more » ... 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, across the G12 countries, a positive relationship 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 industrials, which is in addition to the effect of other linkages already documented. JEL classification: G1, G01, G15
doi:10.2139/ssrn.2569057 fatcat:5clistqmr5b6xfytar3nv2do7a