Corrections in the US Equity Markets

Abstract

In this work, a rule-based definition of market corrections that depends on price volatility is proposed. This enables consistent comparison of corrections in different markets. Statistics of corrections in several US equity indexes and major US equity sector ETFs is compiled. According to the definition proposed in this work, the bear market of 2007 – 2009 had five distinct corrections, three of which exceeded 20%. It is shown that binary variables that account for market corrections improve accuracy of the ARMA-GARCH model for asset returns. Among other findings, volatility during market corrections has increased in recent years. The losses of the SP however, it is not the case since 2007. Corrections in the US equity sector ETFs are determined by the sector-specific trends rather than by their volatility. The results obtained in this work may be useful for better understanding of business cycles and optimal portfolio rebalancing among various equity sectors.