Market Crash Research Articles

Attention allocation: An empirical analysis of the asymmetric market responses to information shocks in China

AbstractAttention allocation—investors allocate their attention disproportionately within a day—has implications on how the market responds to information. Using high‐frequency jumps detected in China, we show that the market underreacts to overnight information shocks, and the underreaction stems mainly from the short‐leg stocks with highly negative overnight jumps. In comparison, the market overreacts to intraday information shocks, and the overreaction stems mainly from the long‐leg stocks with highly positive intraday jumps. Moreover, the underreaction pattern strengthens while the overreaction pattern attenuates during market crashes, as investors pay limited attention when market performance is poor. Overall, these patterns are consistent with the interplay between attention allocation and investor sophistication in reshaping the asymmetric market reactions to information.

Financial contagion across G7 countries during stock market crashes

Financial contagion across G7 countries during stock market crashes

The Impact of Excess Goodwill on Stock Market Crash Risk from an External Auditing Perspective

The Impact of Excess Goodwill on Stock Market Crash Risk from an External Auditing Perspective

Formalism or Substantialism: ESG and Stock Crash Risk

We use a specifically chosen data set of Chinese A-share listed businesses from 2009 to 2022 to investigate the complex relationship between stock crash risk and company Environmental, Social, and Governance (ESG) performance. Based on empirical investigation, a complex U-shaped dynamic is revealed, in which early advances in ESG performance work as a protective factor against stock collapse risk initially, but with ESG performing better, this impact reverses and becomes an enhancer of stock crash risk. We carry out a thorough mediation study to elucidate the underlying mechanisms, revealing the critical roles that business reputation and analyst scrutiny play in mediating the U-shaped link between stock crash risk and ESG. Furthermore, we explore possible moderating factors and find that the adoption of ESG in state-owned organizations and businesses operating in less marketized environments may be motivated by instrumental factors, which would ultimately increase the likelihood of a stock market crash. Thus, by providing a complex and dialectical approach that unites disparate points of view, our work adds to the specialist conversation on the economic consequences of ESG.

Can stock market always act as a ‘barometer’ for industrial system? An analysis on the connectedness between production and return spillover networks

ABSTRACT This study investigates whether the stock market consistently acts as a ‘barometer’ for the industrial system by employing the complex networks theory. We propose a network of production spillovers for the system and a network of return spillovers for the market and then calculate network similarity to explore the connectedness between them. We acquire the following discoveries. On the one hand, there is a weak connectedness between the network structure of production spillovers and that of return spillovers, with the former and latter showing ‘core-periphery’ and ‘uniformity’ associations, respectively; meanwhile, the effects of production shocks on the system are symmetrical, whereas those of return impacts on the market are asymmetrical, suggesting a weak connectedness between them. These confirm that the ‘barometer’ function of the market exhibits low effectiveness. On the other hand, the major events with a direct impact on the production of enterprises, e.g. Covid-19, US–China Trade Friction, Bank Liquidity Crisis and Strict Financial Regulatory Policies, lead to an increase in the connectedness between the system and the market; conversely, those causing indirect shocks through financing channels, like Stock Market Crash, result in a decrease. These verify that the ‘barometer’ function strengthens amidst some major events while weakens during others.

Unraveling stock market crashes: insights from behavioral psychology

PurposeA novel psychology-based framework is proposed to investigate the causes of stock market crashes.Design/methodology/approachOur approach builds upon the dynamic capital mobility model, expanding it by incorporating bidirectional relationships between investor sentiment and the average stock market price level. Investor sentiment is measured in terms of jumping rates of investors’ attitudes to the stock market in our model. The role and impact of investor sentiment on the average stock market price level are further clarified across various scenarios through simulations.FindingsOur model provides a direct quantification of the influence of investor sentiment on stock market price dynamics, shedding light on an alternative mechanism contributing to stock market crashes alongside fundamental changes. Our simulation results confirm that optimistic investor sentiment can mitigate the magnitude of negative stock market price movements triggered by adverse fundamental changes. Our model also indicates that the stock market price level may exhibit higher volatility than can be attributed to fundamental changes.Research limitations/implicationsOur study only briefly touches on the origins of shifts in investor sentiment by introducing a self-fulfilling feedback loop from the average stock market price level to investor sentiment. In future research, we will identify other key factors contributing to shifts in investor sentiment and subsequently analyze their influence on investor sentiment.Practical implicationsOur findings carry practical implications for recent and future movements in the US stock market. For instance, despite the Federal Reserve’s continuous interest rate hikes since March 2022, the overall optimistic investor sentiment has helped mitigate a severe downward movement in the stock market. However, in the absence of clear indications of a loose monetary policy, a rapid shift of investor sentiment from optimism to pessimism in the US stock market could potentially lead to a historic stock market crash.Originality/valueWhile the significance of investor sentiment in shaping stock market price dynamics, particularly regarding cross-sectional variations of stock returns, is widely recognized, quantifying directly its impact on the average stock market price level has remained a persistent challenge. Only very limited literature has delved into this subject, often hindered by a lack of theoretical support or yielding inconsistent results.

Quantum Majorization in Market Crash Prediction

We introduce the Quantum Alarm System, a novel framework that combines the informational advantages of quantum majorization applied to tail pseudo-correlation matrices with the learning capabilities of a reinforced urn process, to predict financial turmoil and market crashes. This integration allows for a more nuanced analysis of the dependence structure in financial markets, particularly focusing on extreme events reflected in the tails of the distribution. Our model is tested using the daily log-returns of the 30 constituents of the Dow Jones Industrial Average, spanning from 2 January 1992 to 30 August 2024. The results are encouraging: in the validation set, the 12-month ahead probability of correct alarm is between 73% and 80%, while maintaining a low false alarm rate. Thanks to the application of quantum majorization, the alarm system effectively captures non-traditional and emerging risk sources, such as the financial impact of the COVID-19 pandemic—an area where traditional models often fall short.

Survive the economic downturn: Operating flexibility, productivity, and stock crash

AbstractOperating flexibility supports a firm's resilience strategy during challenging times by enabling them to promptly cut down operating costs associated with unproductive resources. We employ a real options model to formalize this insight. Our empirically grounding analytics motivate a firm‐level proxy for downscale operating flexibility (FLEX), which effectively captures the adjustment frictions across different contexts of firms' operations. Using U.S. data between 1961 and 2020, we show that operating flexibility mitigates the risk of stock price crashes, especially during periods of economic recession. Consistent with the loss‐curtailment mechanism, the operating flexibility effect is more pronounced for firms with lower productivity/profitability or higher operating leverage and is further amplified during longer and more severe recessions. Managers may avail themselves of our well‐tested empirical measure of operating flexibility to guide their efforts in building a more resilient operations structure.

Economic policy uncertainty and stock market crash risk: international evidence

ABSTRACT The current study seeks to investigate the impact of Economic Policy Uncertainty (EPU) on crash risk across 21 countries using monthly data over 13 years. Interestingly, higher EPU is associated with lower crash risk. The findings indicate that stock markets with high returns, volatility, liquidity, and undervaluation are less likely to experience market crashes. Moreover, the crash risk increased during the COVID-19 period. Conversely, the results indicate that the crash risk does not respond significantly to the Russian–Ukrainian war. The magnitude of the effects differs between developed and emerging countries.

The Dynamic Impact of World Pandemic Uncertainty on Stock Market Crash Risk: An International Study

This paper examines the dynamic impact of world pandemic uncertainty on the crash risk of international stock markets. The results show world pandemic uncertainty has a positive impact on the crash risk. The effect is largest in the first quarter and significantly fades away in the following three quarters after the shock. Our results are robust for developed and emerging markets and for alternative measures of crash risk and world pandemic uncertainty.

Non-Oil Sector Performance and Economic Growth in Nigeria

Most of Nigeria's public income comes from oil exports, making it vulnerable to global market crashes and instability. The economy is currently experiencing a downturn due to the 2014–2015 decline in the value of crude oil. To increase the manufacturing of non-oil product exports and generate external cash, the state government is nowadays met with the challenge of reorienting the economy to the non-oil sector. The study specifically considered the effect of non-oil sector performance, such as the output of the industrial, service, and agricultural sectors, on economic growth in Nigeria using yearly time series data from 1999 to 2022. The growth rate maximization theory was used in this investigation. The World Bank (2022) and the CBN Statistical Bulletin (2022) provided the data used in this analysis. Multiple regression analysis approaches were employed in the study. As the outcomes showed, the growth of the Nigerian economy is positively and significantly impacted by the output of the exchange rate, the manufacturing, service, and agricultural sectors; government spending has a negligible and negative effect on the growth of the economy. The research suggested that incentives should be created to support and expand Nigeria's manufacturing, service, and agricultural sectors to sustain the growth of the economy.

Stock fire sale risks and the effect of China connect

We use granular account-level data from margin trading during the 2015 stock market crash in China to compute each stock's exposure to fire sale risks during the market turmoil. When we form the treatment group of stocks with low exposures and the control group of stocks with high exposures, we find that the diff-in-diff regression using this setting generates results qualitatively similar to the regression based on treatment/control groups setting according to whether the stock was in the STOCK-CONNECT list after 2015. When we re-run the regressions to examine the effects of the introduction of STOCK-CONNECT program in a subsample of stocks with similar exposures to fire sale risks, the difference between impact of stock market liberalization on stocks tradable by foreign investors and on stocks not tradable by foreign investors become insignificant. Our empirical results provide evidence supporting the conjecture that the effects of two salient events (the introduction of the STOCK-CONNECT and the stock bubble formation and burst) mix together.

Impact of crisis events on stock market volatility and risks

The COVID-19 crisis, which occurred in 2020, brought crisis events back to the attention of scholars. With the increasing frequency of crisis events, the influence of crisis events on stock markets has become more obvious. This paper focuses on the impact of the subprime crisis, the Chinese stock market crash crisis and the COVID-19 crisis on the volatility and risk of the world’s major stock markets. In this paper, we first fit the volatility using EGARCH model and detect asymmetry of volatility. After that, a VaR model is calculated on the basis of EGARCH to measure the impact of the crisis event on the risk of stock markets. This paper finds that the subprime crisis has a significant influence on the risk of the stock market in China, US, South Korea, and Japan. During the COVID-19 crisis, there was little change in the average risk of each country. But at the beginning of the COVID-19 crisis, there was a significant increase in the risk of each country’s stock market. The Chinese stock market crash crisis had a more pronounced effect on the Chinese and Japanese stock markets and a lesser effect on the US and Korean stock markets.

The influence of the “environmental-friendly” character through asymmetries on market crash price of risk in major stock sectors

This paper investigates the impact that the ‛green character’ of stocks generates on their market price of risk. The study covers a spectrum of international large-cap stocks in influential sectors since 1 January 2013 up to 5 July 2022. Focusing on the asymmetric and shape features of price risk, econometric outcomes reveal that well-established (Industrials) or highly profitable (Technology) sectors are less affected by the skewness/kurtosis price of risk or the “environmental-friendly” features. On the contrary, sectors vulnerable to alterations in income or wealth, such as Financials and Real Estate are more sizably influenced by negative asymmetry, kurtosis, and the higher volatility in bear markets. The ‛green character’ lowers the market price of stocks, increases risk premia due to higher probability for downwards movements and renders investors more risk-averse and nevertheless, this impact only reflects the initial period of green innovation with high anti-polluting costs as the green label could prove to be greatly beneficial in the future.

A study of the impact of short selling mechanism on the stock price collapse risk

Drawing from an extensive review of existing literature, this study investigates the influence of the short selling mechanism (SSM) on x through both theoretical and empirical lenses. It further assesses whether this mechanism can effectively mitigate stock price collapse risk (SPCR). The findings reveal that the SSM has a significant moderating effect on stock price declines, with stability tests for alternative factors affirming the robustness of these results. The study then narrows its focus to listed companies in China, examining the role of the SSM in this specific context. Results indicate that the SSM enhances the information content of stocks, thereby reducing the risk of stock market crashes. Using regression analysis and a mediating role model, the paper empirically explores the relationship between the SSM and SPCR. The conclusions suggest that the SSM can partially reduce the risk of stock market crashes by increasing the information content of stock prices.

Relationship Between IPO and Company Development Based on the Case of Poten Enviro

Abstract: The stock market crash in early 2024 in China has sparked criticism from investors regarding the current Chinese IPO system. There has been extensive debate on whether IPOs should serve as a venue for financing for companies facing internal and external development difficulties and questionable profitability, and whether the interests of shareholders should receive better protection. To delve deeper into the issues surrounding the Chinese IPO system, a listed companyPoten Envirohas been selected, and a comprehensive review has been conducted on its development history, internal and external challenges, IPO process, financial irregularities, and other related behaviors. The company should proper analyze the external environmental changes, and the IPO should not be pursued blindly. Also, the regulation institution should strengthen supervision of listed companies to avoid losses for the public. This study will be beneficial in providing insights for the reform of the Chinese stock market and offering guidance for strategic decision-making by enterprises.

Idiosyncratic risk and stock price crash risk: The moderating role of discretionary income smoothing

Given the growing significance of the capital market, investors tend to steer clear of stock price crashes. This study aims to examine how idiosyncratic risk affects the likelihood of a stock price crash and how discretionary income smoothing affects the relationship between them. This study uses a data panel to empirically examine the hypothesis. This study uses a data panel to empirically examine the hypothesis, using 1,203 firm-year observations from non-financial companies publicly traded on the Indonesia Stock Exchange from 2019 to 2021. The results show that firms with greater idiosyncratic risk do not significantly generate higher stock price crash risk. Nevertheless, this study also discovered that managing discretionary income smoothing is essential to increasing the risk of crashes. The test shows that the coefficient of discretionary income smoothing is 0.153 and significant with a t-value of 2.104. Moreover, the investigations also indicate that greater use of discretionary income smoothing can amplify the impact of idiosyncratic risk on the likelihood of stock price crashes. This is shown from the results where the moderation of the two variables has a positive coefficient of 0.087 and is significant at 10% with a t-value of 1.446. Based on the findings, this study concludes that the presence of idiosyncratic risk by itself may not substantially impact the probability of stock market crashes. However, combined with discretionary income smoothing, it can worsen the potential negative consequences. It implies that how a firm reports its income can affect its susceptibility to stock price crashes.

Functional Hypergraphs of Stock Markets.

In stock markets, nonlinear interdependencies between various companies result in nontrivial time-varying patterns in stock prices. A network representation of these interdependencies has been successful in identifying and understanding hidden signals before major events like stock market crashes. However, these studies have revolved around the assumption that correlations are mediated in a pairwise manner, whereas, in a system as intricate as this, the interactions need not be limited to pairwise only. Here, we introduce a general methodology using information-theoretic tools to construct a higher-order representation of the stock market data, which we call functional hypergraphs. This framework enables us to examine stock market events by analyzing the following functional hypergraph quantities: Forman-Ricci curvature, von Neumann entropy, and eigenvector centrality. We compare the corresponding quantities of networks and hypergraphs to analyze the evolution of both structures and observe features like robustness towards events like crashes during the course of a time period.

Media pressure, corporate social responsibility, and the risk of share price crash

The investigation employs a compilation of data from 5085 listed entities over the period from 2013 to 2022 to explore the dynamics between media coverage, corporate social responsibility initiatives (CSR), and the risk of stock market crashes. The results suggest that greater media focus can elevate the chances of stock value plummeting, whereas robust CSR dedication tends to mitigate such risks. The extent of overall debt funding plays a significant role as an intermediary in the connection between CSR efforts and the threat of equity market meltdowns. Moreover, the influence of the audit services provided by the Big Four firms greatly alters the correlation between CSR endeavors and the probability of market downturns. Additionally, the influence of CSR on the risk of crashes varies based on the profitability of the company. The study proposes that enhancing CSR execution, maintaining moderate levels of financial leverage, and optimizing approaches to media relations can all contribute to reducing the likelihood of stock market crashes.

Near or far? An investigation into the relationship between spatial proximity to CSRC district offices and stock crash risk

ABSTRACT Our analysis reveals that companies with headquarters in further proximity to China Securities Regulatory Commission (CSRC) district offices are more susceptible to stock crash risk. Furthermore, this relationship is notably stronger for firms whose CEOs lack political connections, are non-state-owned, and are not audited by the Big Four audit firms. Our findings imply that regulatory remoteness plays a crucial role in shaping stock market dynamics and risk.