Which programming language is best for economic research: Julia, Matlab, Python or R?
20 August 2020
ARM on AWS for R
15 June 2020
Low vol strategies
8 May 2020
Of Julia and R
8 May 2020
How to manipulate risk forecasts 101
30 April 2020
The five principles of correct riskometer use
27 April 2020
The problem with Backtesting
25 April 2020
The magic of riskometers
24 April 2020
Risk and scientific socialism
23 April 2020
Financial crises and epidemics
19 April 2020
Hayek and Corona
17 April 2020
Hayek et Corona
17 April 2020
Ignoring the Corona analysis
15 April 2020
The coronavirus crisis is no 2008
26 March 2020
Artificial intelligence as a central banker
6 March 2020
Systemic consequences of outsourcing to the cloud
2 December 2019
The dissonance of the short and long term
12 August 2019
Central banks and reputation risk
6 August 2019
The Brexit culture war
5 May 2019
All about BoB — The Bank of England Bot
29 April 2019
My tiny, tiny contribution to Apple's fall in profits
6 January 2019
The 2018 market in a 250 year context
1 January 2019
Short and long-term risk
3 December 2018
Perceived and actual risk
2 December 2018
Cryptocurrencies: Financial stability and fairness
9 November 2018
The October 2018 stock market in a historical context
1 November 2018
The hierarchy of financial policies
12 September 2018
Which numerical computing language is best: Julia, MATLAB, Python or R?
9 July 2018
Cryptocurrencies
26 June 2018
What are risk models good for?
3 June 2018
The McNamara fallacy in financial policymaking
1 June 2018
VIX, CISS and all the political uncertainty
20 May 2018
Here be dragons
30 March 2018
Low risk as a predictor of financial crises
26 March 2018
Cryptocurrencies don't make sense
13 February 2018
Yesterday's mini crash in a historical context
6 February 2018
Artificial intelligence and the stability of markets
15 November 2017
European bank-sovereign doom loop
30 September 2017
Do the new financial regulations favour the largest banks?
27 September 2017
The ECB Systemic Risk Indicator
24 September 2017
Finance is not engineering
22 September 2017
University of Iceland seminar
14 June 2017
Brexit and systemic risk
31 May 2017
Should macroprudential policy target real estate prices?
12 May 2017
Learning from history at LQG
13 April 2017
Is Julia ready for prime time?
12 March 2017
With capital controls gone, Iceland must prioritise investing abroad
12 March 2017
Competing Brexit visions
25 February 2017
Systemic consequences of Brexit
23 February 2017
Why macropru can end up being procyclical
15 December 2016
The fatal flaw in macropru: It ignores political risk
8 December 2016
Why it doesn't make sense to hold bonds
27 June 2016
On the financial market consequences of Brexit
24 June 2016
Cyber risk as systemic risk
10 June 2016
Big Banks' Risk Does Not Compute
24 May 2016
Interview on þjóðbraut on Hringbraut
21 May 2016
Farewell CoCos
26 April 2016
Will Brexit give us the 1950s or Hong Kong?
18 April 2016
Of Brexit and regulations
16 April 2016
IMF and Iceland
12 April 2016
Stability in Iceland
7 April 2016
Everybody right, everybody wrong: Plural rationalities in macroprudential regulation
18 March 2016
Of tail risk
12 March 2016
Models and regulations and the political leadership
26 February 2016
Why do we rely so much on models when we know they can't be trusted?
25 February 2016
Does a true model exist and does it matter?
25 February 2016
The point of central banks
25 January 2016
The macro-micro conflict
20 October 2015
Volatility, financial crises and Minsky's hypothesis
2 October 2015
Impact of the recent market turmoil on risk measures
28 August 2015
Iceland, Greece and political hectoring
13 August 2015
A proposed research and policy agenda for systemic risk
7 August 2015
Are asset managers systemically important?
5 August 2015
Objective function of macro-prudential regulations
24 July 2015
Risky business: Finding the balance between financial stability and risk
24 July 2015
Regulators could be responsible for next financial crash
21 July 2015
How Iceland is falling behind. On Sprengisandur
12 July 2015
Greece on Sprengisandur
12 July 2015
Why Iceland can now remove capital controls
11 June 2015
Market moves that are supposed to happen every half-decade keep happening
14 May 2015
Capital controls
12 May 2015
What do ES and VaR say about the tails
25 April 2015
Why risk is hard to measure
25 April 2015
Post-Crisis banking regulation: Evolution of economic thinking as it happened on Vox
2 March 2015
The Danish FX event
24 February 2015
On the Swiss FX shock
24 February 2015
Europe's proposed capital markets union
23 February 2015
What the Swiss FX shock says about risk models
18 January 2015
Model risk: Risk measures when models may be wrong
8 June 2014
The new market-risk regulations
28 November 2013
Solvency II: Three principles to respect
21 October 2013
Political challenges of the macroprudential agenda
6 September 2013
Iceland's post-Crisis economy: A myth or a miracle?
21 May 2013
The capital controls in Cyprus and the Icelandic experience
28 March 2013
Towards a more procyclical financial system
6 March 2013
Europe's pre-Eurozone debt crisis: Faroe Islands in the 1990s
11 September 2012
Countercyclical regulation in Solvency II: Merits and flaws
23 June 2012
The Greek crisis: When political desire triumphs economic reality
2 March 2012
Iceland and the IMF: Why the capital controls are entirely wrong
14 November 2011
Iceland: Was the IMF programme successful?
27 October 2011
How not to resolve a banking crisis: Learning from Iceland's mistakes
26 October 2011
Capital, politics and bank weaknesses
27 June 2011
The appropriate use of risk models: Part II
17 June 2011
The appropriate use of risk models: Part I
16 June 2011
Lessons from the Icesave rejection
27 April 2011
A prudential regulatory issue at the heart of Solvency II
31 March 2011
Valuing insurers' liabilities during crises: What EU policymakers should not do
18 March 2011
Risk and crises: How the models failed and are failing
18 February 2011
The saga of Icesave: A new CEPR Policy Insight
26 January 2010
Iceland applies for EU membership, the outcome is uncertain
21 July 2009
Bonus incensed
25 May 2009
Not so fast! There's no reason to regulate everything
25 March 2009
Modelling financial turmoil through endogenous risk
11 March 2009
Financial regulation built on sand: The myth of the riskometer
1 March 2009
Government failures in Iceland: Entranced by banking
9 February 2009
How bad could the crisis get? Lessons from Iceland
12 November 2008
Regulation and financial models: Complexity kills
29 September 2008
Blame the models
8 May 2008

The 2018 market in a 250 year context

1 January 2019

The financial markets did not have a good 2018 as the media kept on reminding us:

Explanations abound. The president thinks it’s the fault of the central bank “Trump Blasts Fed”, while others blame the president “The Trump Volatility Risks”.

So, after the markets finally closed, how bad was it? The world’s most important stock index, the S&P 500 fell by -6.4% in 2018 if calculated by log returns. If adjusted by inflation, even bigger at -9%.

The Nikkei 225 did worse,-12.9%, followed by the FTSE at -14.6% while DAX beat them all with -20.7%.

In a historical context, was it as bad as the media would have it? While the S&P 500 index only dates back to 1957, has been reconstructed back to the late 1700s.

I don’t have the other indices that far back, so can only show them for the past 30 years.

For the record, in what follows all prices have been adjusted for inflation, but not corrected for dividends.

Returns

By plotting the S&P 500 returns, 2018 does not look all that bad, and there are many worse years.

It is easier to compare 2018 to other years if I sort the returns and identify 2018 in red:

Which years are worse?

Fairly innocuous, 47 years are worse than 2018, making it the 21% worst year in the sample, or about the typical worst year every five years.

Volatility

2018 was also said to be volatile. If I calculate (realized) volatility:

and as above, identify 2018 in red.

Not very volatile. 48 years have higher volatility than 2018, making it the 22% worst year in the sample, or about the typical worst year every five years.

Recent history and more indices

I don’t have that long a history for many countries. Suppose I use the past 30 years for the US, UK, Japan, and Germany, and calculate how often we can expect to get a worse year than 2018.

Japan, not surprisingly, had a fairly typical year, (it has a lot of bad market years), but for the rest, 2018 was about almost a once a decade event. That is only half the frequency of the full sample, showing how well markets are performed in more recent history.

What about decades?

With all that history, I can also calculate market performance over decades, for example for 2009 to 2018.

We must have lived in good times! Even counting for 2018, the past decade is the fourth best in history.

However, investors can expect to lose more than half their money in 30% of the decades. Proving that the stock market is a dangerous short-term investment.

Is December particularly dangerous?

The worst month of the year was December, and the newspaper headlines liked to tell us that it was the worst December since the Great Depression. Typically, December isn’t all that bad, the second safest month after April. In more recent history, it is even better.

December 2018 is the third worst December in history, only beat by 1931 and 1851,

and overall, the 44th worst month, or unconditionally 1.6% worst.

So, while 2018 wasn’t all that bad, December was.

So what can we expect?

Unconditionally, we have 102 negative years and 123 positive years, or 55%.

Of the 101 negative years before 2018, 59 are positive and 42 negative, so 58% of the years after a negative year are positive. Slightly better than in a typical year.

Conclusion

At the end of the day, 2018 was an attack by a toothless dragon.

© All rights reserved, Jon Danielsson, 2020