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

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Visualizing Stock Market Risk: 7/1926 to 6/2015 by Wesley R. Gray, Ph.D.Alpha Architect, author,

Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.

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

Here are the specific stats:

Bucket Observations Frequency Cumulative
-5.00% 59 0.25% 0.25%
-4.50% 20 0.09% 0.34%
-4.00% 31 0.13% 0.47%
-3.50% 46 0.20% 0.66%
-3.00% 85 0.36% 1.03%
-2.50% 164 0.70% 1.72%
-2.00% 289 1.23% 2.95%
-1.50% 547 2.33% 5.28%
-1.00% 1154 4.91% 10.19%
-0.50% 2566 10.91% 21.10%
0.00% 5599 23.82% 44.92%
0.50% 7048 29.98% 74.90%
1.00% 3416 14.53% 89.43%
1.50% 1331 5.66% 95.09%
2.00% 563 2.39% 97.49%
2.50% 237 1.01% 98.49%
3.00% 115 0.49% 98.98%
3.50% 69 0.29% 99.28%
4.00% 61 0.26% 99.54%
4.50% 37 0.16% 99.69%
5.00% 19 0.08% 99.77%
More 53 0.23% 100.00%

How about drawdowns?

Daily returns are one thing–let’s review the top 30 stock market drawdowns over the past 90+ years.

Rank Date Start Date End VW_CRSP
1 8/30/1929 6/30/1932 -83.67%
2 10/31/2007 2/28/2009 -50.37%
3 2/27/1937 3/31/1938 -49.18%
4 12/31/1972 9/30/1974 -46.46%
5 8/31/2000 9/30/2002 -45.09%
6 11/30/1968 6/30/1970 -33.56%
7 8/31/1987 11/30/1987 -29.91%
8 8/31/1932 2/28/1933 -28.47%
9 5/31/1946 5/29/1947 -23.85%
10 12/31/1961 6/30/1962 -23.06%
11 1/31/1934 7/31/1934 -18.34%
12 8/31/1933 10/31/1933 -17.95%
13 4/30/2011 9/30/2011 -17.71%
14 6/30/1998 8/31/1998 -17.39%
15 5/31/1990 10/31/1990 -16.97%
16 11/30/1980 7/31/1982 -16.62%
17 1/31/1966 9/30/1966 -15.45%
18 7/31/1957 12/31/1957 -14.95%
19 4/30/2010 6/30/2010 -12.99%
20 1/31/1980 3/31/1980 -11.98%
21 8/31/1978 10/31/1978 -11.95%
22 6/30/1983 5/31/1984 -10.83%
23 3/31/2000 5/31/2000 -9.64%
24 12/31/1976 2/28/1978 -9.33%
25 7/31/1956 2/28/1957 -8.37%
26 8/31/1986 9/30/1986 -8.15%
27 3/31/1936 4/30/1936 -8.02%
28 12/31/1959 10/31/1960 -7.97%
29 6/30/1943 11/30/1943 -7.76%
30 1/31/1994 6/30/1994 -7.60%

And here are the numbers outlined on a chart:

top 30 drawdowns in the stock market

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

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