Perspectives: Is the Recent Financial Crisis Really a 'Once-in-A-Century' Event?
Posted: 18 Feb 2010
Date Written: 2010
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
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