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

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Includes: CFA, CFO, CSF, LGLV, SMLV, SPLV, XMLV, XSLV
by: Alpha Architect

Summary

How crazy is current market action? 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.

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

By Wesley R. Gray

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:

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:

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

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