Fragility, Stress, and Market Returns

42 Pages Posted: 10 Nov 2015 Last revised: 13 Nov 2015

Dave Berger

Oregon State University

Kuntara Pukthuanthong

University of Missouri, Columbia

Date Written: November 8, 2015

Abstract

We propose a novel risk measure that relates to subsequent negative conditional stock market returns. Our risk measure considers both the fragility and stress of the market. Fragility is measured by the Fragility Index developed by Berger and Pukthuanthong (2012) and market stress is based on several economic variables. Results show that incorporating both market stress and fragility improves the information content of a risk measure. Our risk measure relates to poor subsequent monthly market returns. We show the risk measure contains predictive information in a purely ex-ante specification.

Keywords: Financial crises; Risk; Asset-pricing

JEL Classification: G01; G10; G14

Suggested Citation

Berger, Dave and Pukthuanthong, Kuntara, Fragility, Stress, and Market Returns (November 8, 2015). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2687814

Dave Berger (Contact Author)

Oregon State University ( email )

Bexell Hall 200
Corvallis, OR 97331
United States

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

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