Submitted by Salil Mehta via Statistical Ideas blog, [3]
China's Shanghai Composite index was stopped down nearly 7% on the first trading day of the new year. This is worse than 99.6% of all trading days since the beginning of 2007 (a monstrous era covering the entire market turmoil of the global financial crisis).
To put some risk context behind how poor a ~7% drop is -in relation to the worst losses over different time (not just relative to all daily changes)- we look at a variety of time units. This is different from the market convolution math discussed previously (here [4], here [5]). For example, today’s loss in China is worse than 93% of the worst daily losses per month, since 2007. We see this in the chart immediately below. And in the chart further below that, we see today’s loss is worse than 67% of the worst daily losses per year. Lastly, in that same chart, we show China’s first day loss is worse than even the majority of the worst weekly losses per year! This conservative measure substantiates that on just a single day, the losses stemming from China has breached most of the worst risk levels that would normally take a complete week to get through.
[6]And we see in the chart above that today's loss in China is worse than the worst daily loss coming out of 100 out of the past 108 months (only the 3 months where the worst daily loss was rounded to 0% have been truncated from the chart above)! In fact, as shown in the blue portion of the chart, there have only been 4 months since mid-2008, where the worst daily loss that month was worse than today's loss. Those 2015 months are: January, June, July, and August.
[7]We see in the jittery chart above (third column), that today's loss is worse than the worst daily loss coming out of 6 of the past 9 years (hence the 67%). And in the middle column we see today's loss is worse than the worst weekly loss coming out of 5 of the past 9 years (or the majority)! This statistic provides a powerful segue with our prequel article [8] on the worst weekly loss distributions. Finally in the first column we see that today's loss is worse than the worst monthly loss coming out of even 2 of the past 9 years.
The main takeaways from this article is that market shocks can be quite quick, when they suddenly unravel. There is no need for markets to follow an observable pattern [9] (therefore casting an omen just for you). Recall as well that this is just "day 1"! There are ~20 additional dramatic trading days ahead this month, where anything can precipitously take place.
