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

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

August 28, 2015 Uncategorized
Print Friendly
(Last Updated On: January 18, 2017)

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:

Bucket Observations Frequency Cumulative
Less than -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 than 5.00% 53 0.23% 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).

Rank Date Start Date End VW_CRSP LTR
1 8/30/1929 6/30/1932 -83.67% 14.29%
2 10/31/2007 2/28/2009 -50.37% 20.55%
3 2/27/1937 3/31/1938 -49.18% 0.22%
4 12/31/1972 9/30/1974 -46.46% -6.05%
5 8/31/2000 9/30/2002 -45.09% 33.46%
6 11/30/1968 6/30/1970 -33.56% -8.02%
7 8/31/1987 11/30/1987 -29.91% 2.55%
8 8/31/1932 2/28/1933 -28.47% 0.88%
9 4/30/1940 4/30/1942 -27.62% 6.99%
10 5/31/1946 5/29/1947 -23.85% 1.04%
11 12/31/1961 6/30/1962 -23.06% 3.97%
12 1/31/1934 7/31/1934 -18.34% 6.59%
13 8/31/1933 10/31/1933 -17.95% -0.68%
14 4/30/2011 9/30/2011 -17.71% 9.44%
15 6/30/1998 8/31/1998 -17.39% 3.70%
16 5/31/1990 10/31/1990 -16.97% 3.59%
17 11/30/1980 7/31/1982 -16.62% 17.87%
18 1/31/1966 9/30/1966 -15.45% -0.18%
19 7/31/1957 12/31/1957 -14.95% 8.86%
20 12/31/1938 4/29/1939 -14.33% 3.87%
21 4/30/2010 6/30/2010 -12.99% 4.68%
22 1/31/1980 3/31/1980 -11.98% -7.67%
23 8/31/1978 10/31/1978 -11.95% -3.04%
24 5/28/1948 11/30/1948 -10.88% -0.08%
25 6/30/1983 5/31/1984 -10.83% -2.59%
26 3/31/2000 5/31/2000 -9.64% -0.10%
27 12/31/1976 2/28/1978 -9.33% -1.45%
28 7/31/1956 2/28/1957 -8.37% -0.65%
29 8/31/1986 9/30/1986 -8.15% -2.07%
30 3/31/1936 4/30/1936 -8.02% 0.35%
31 12/31/1959 10/31/1960 -7.97% 11.44%
32 12/31/1947 2/28/1948 -7.94% 0.66%
33 6/30/1943 11/30/1943 -7.76% 0.36%
34 1/31/1994 6/30/1994 -7.60% -6.78%
35 12/31/1989 1/31/1990 -7.28% -1.99%
36 9/30/1979 10/31/1979 -7.23% -8.41%
37 3/31/2012 5/31/2012 -6.98% 4.23%
38 12/31/1952 8/31/1953 -6.95% -1.66%
39 12/31/1967 2/29/1968 -6.89% 2.94%
40 6/30/1999 9/30/1999 -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.


Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.


Join thousands of other readers and subscribe to our blog.


Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.


Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, 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 that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Mark

    Thanks for the post!! I used the same data as you indicated in the post, and calculated the drowdown from 8/30/1929 to 6/30/1932. And found that the return during this period is -83.707% instead of -83.67%, so just curious how you calculated the data ? I know the difference is little, but I think it still matters

  • the drawdown calcs are based on monthly data, which may be one difference. It could also be a decimalization issue as well (ie., we use 4 digit, you used 2 digit or 6 digit). Finally, for the drawdown table we used data drawn from a month ago and sometimes French backfills data that has small changes.
    Of those 3 options, 1 of them–or a combo–probably explains the difference

  • sixchickensleft

    Hi Wes – Nice post. My take on it all is that really, really good stuff happens sometimes and, likewise, really really bad stuff happens sometimes, too. The key is that these really extreme things DO happen. Too often people conflate their LOW incidence of occurrence with NO incidence of occurrence and that leads to disappointment. My simplistic view is this: Suppose John and Mary have 10 kids and they’re all girls. Now, when many people say that having 10 kids that are all girls is rare, they get really fuzzy in their thinking and mean that it’s rare that ANYBODY would have 10 kids that are all girls. What they should understand is that it would be really rare if we looked at all of the families with 10 kids and found NONE that had 10 girls. The tail event may be one of low probability, but an absence of the tail event is even more unlikely. PS – This works at the craps table as well, but I’m not that lucky.

  • Were there no observations of less than -5.0%?

  • 59. relabeled to clarify that the -5% means “less than -5%”. Sorry for confusion

  • Mark

    Hi Wes, thanks for the reply. I checked the drawdown table again. I think here are a few drawdowns that are supposed to be picked up in the table but are no there. Please correct me if I am wrong.

    1. 04/30/1940-30/04/1942: -27.9%
    2. 12/31/1938-04/30/1939: -14.5%
    3. 06/30/1975-09/30/1975: -11.8%
    4. 05/31/1948-11/30/1948: -11.0%

    Those are the four missing drawdowns that are greater than 10 % and are missing in the table.
    I used the same monthly return data from Ken’s month website. Again, let me know if I am wrong. Thanks again

  • Yep, updated. Thx for highlighting. DD search algo didn’t have enough loops the first time around.
    Also went out to top 40 to emphasize how many downside events there are.

  • Mark

    Thanks for the update and apologized to keep bugging you on this!! But it looks like there are still some that are not picked up…not sure if the loops are not enough. I attached my top 30 DD and highlighted the ones that are missing from your table.

    I got lots of inspiration from the posts in AA and would certainly like to share the code if you are interested.

  • Naw, not a problem at all–thanks for highlighting issue! We have an approximation algo to make the code faster, but we may just have to go the brute force method.

    What language you using? Love to check out code.

  • Steve

    The ’29 – ’32 draw down always makes me feel like I should be 50/50 stocks (or something). 83% is as good as 100% in real life (for most people).

    Ever since I first looked at this period of time, I’ve wondered about it. All the good papers / books / blogs etc on factor or quant investing mostly use data from the 60’s (as that’s what’s available) and that unfortunately misses this period of time.

    I invest like the 1930’s didn’t happen, and that concerns me.

    If not bonds, it certainly makes a good case for trend following the market – even if it does cost a couple of points.

  • Mark

    I use MATLAB. I actually designed the algo based on a comment you pasted to me the other day. The computation is pretty fast (couple seconds, I think). Anyway, I will drop you an email with code tomorrow when I get back to the office.

  • Bill Grant

    Thank you, Wes and Mark. Which of French’s files should I use to reproduced some of your work above?

  • Anon

    Would it be possible to see the code?