Stock Market Risk in the Financial Crisis

60 Pages Posted: 25 Feb 2015 Last revised: 10 Nov 2015

See all articles by Paul A. Grout

Paul A. Grout

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)

Anna (Ania) Zalewska

University of Bath - Centre for Governance, Regulation and Industrial Strategy; School of Management

Date Written: November 7, 2015

Abstract

In this paper, we look at the effect of the financial crisis from an angle overlooked to date in the finance literature by investigating composition effects arising from the financial crisis. A composition effect is a change in the market risk of a sector that is caused not by a direct change in that sector but by a change in another sector that affects the composition of the stock market. In the paper we investigate the pre and during crisis market risk of the industrial, banking and utilities sectors. Amongst other results, we find, across the G12 countries, a positive relationship between the increase in the market risk of industrials during the crisis and both the pre-crisis market risk of the banking sector and the scale of the systemic crisis in a country. The six G12 countries that experienced a major systematic banking crisis are amongst the seven countries with the largest increases in the market risk for industrials. Results drawn from our detailed analysis using US data are consistent with these findings. Finally, we show how the results add to our understanding of the linkages between the financial and real sector and conclude that composition effects of the financial crisis could have a significant chilling effect on investment industrials, which is in addition to the effect of other linkages already documented.

Keywords: financial crisis, systemic risk, market risk, utilities, banking sector, industrials

JEL Classification: G10, G01, G15

Suggested Citation

Grout, Paul A. and Zalewska, Anna, Stock Market Risk in the Financial Crisis (November 7, 2015). Available at SSRN: https://ssrn.com/abstract=2569057 or http://dx.doi.org/10.2139/ssrn.2569057

Paul A. Grout

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO) ( email )

Mary Paley Building
12 Priory Road Department of Economics
Bristol BS8 1TN
United Kingdom

Anna Zalewska (Contact Author)

University of Bath - Centre for Governance, Regulation and Industrial Strategy; School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
+44 0 1225 384354 (Phone)
+44 0 1226 384354 (Fax)

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