Felix Salmon

Stock volatility datapoint of the day, Shanghai edition

By Felix Salmon
August 31, 2009

A bear market is commonly defined as when you drop more than 20% from the high point; in Shanghai, stocks — which fell 6.7% today alone — have managed to drop more than 20% just in the month of August. But the other major Asian indices didn’t seem too perturbed — none dropped more than 2%, while Kuala Lumpur and Taiwan both rose — and the crazy volatility of the Shanghai bourse should really be put down to Shanghai-specific factors, including the monster run-up the index has had this year.

It both makes sense and is reassuring that global stock markets don’t seem particularly susceptible to contagion from China, either in terms of direction or just in terms of volatility. Traders see the data coming from Shanghai, and essentially ignore it: neither the level of the Shanghai stock index nor its first derivative is a useful piece of information for anybody not directly invested there. The Hang Seng, in Hong Kong, is much more grown-up.

That said, virtually all global stock markets, including that S&P 500, are looking pretty frothy these days, and in this kind of an environment you never know what will set them off. I’m not holding my breath, but at some point a relatively innocuous piece of data will be blamed for a massive global sell-off: while it might be something domestic and macroeconomic, it could equally easily be a movement in some foreign market. Stocks worldwide are going to remain very volatile for the foreseeable future; Shanghai is just the most extreme example.

One comment so far | RSS Comments RSS

Arbitrage Pricing Theory implies that factors making up the asset’s price will mean assets will affect each other if they share “factors.”

China is not “connected” to the US market, you can’t invest in it, you can’t hedge it, and you can’t hedge their currency.

It’s beholden to their gov’t. It’s a dictatorship. If there’s a correlation, it’ll last as long as asset correlations last, and that length of time is indeterminate.

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