Perspectives: Is the Recent Financial Crisis Really a 'Once-in-A-Century' Event?

Posted: 18 Feb 2010

See all articles by Guofu Zhou

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: 2010

Abstract

On 9 October 2007, the Dow Jones Industrial Average reached a high of 14,164.53; by 9 March 2009, it had dropped about 54 percent, to a low of 6,547.05. Former Fed chairman Alan Greenspan called this a “once-in-a-century” crisis. The authors show that the probability of a stock market drop of 50 percent from a high is about 90 percent over a 100-year period, based on the popular random walk model of stock prices. With a broad market index and a more sophisticated asset pricing model that captures more risks in the economy, the probability rises to above 99 percent. A market drop of 50 percent or more is very likely in long-term stock market investments, and investors should be prepared for it.

Keywords: Investment Theory, CAPM, APT, Pricing Theories, Risk Measurement and Management, Financial Markets

Suggested Citation

Zhou, Guofu and Zhu, Yingzi, Perspectives: Is the Recent Financial Crisis Really a 'Once-in-A-Century' Event? (2010). Financial Analysts Journal, Vol. 66, No. 1, 2010, Available at SSRN: https://ssrn.com/abstract=1553815

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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