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Corrections in the US Equity Indexes and Sector Exchange-Traded Funds

Anatoly B. Schmidt
The Journal of Beta Investment Strategies Spring 2020, jii.2020.1.082; DOI: https://doi.org/10.3905/jii.2020.1.082
Anatoly B. Schmidt
is a lead research scientist with Kensho Technologies in New York, NY, and adjunct professor in the Financial Risk and Engineering Department, New York University School of Engineering in Brooklyn, NY;
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Abstract

In this article, a rule-based definition of market corrections that depends on price volatility is proposed. This enables consistent comparison of corrections in different markets. Statistics of corrections in several US equity indexes and major US equity sector exchange-traded funds are compiled. According to the definition proposed in this work, the bear market of 2007–2009 had five distinct corrections, three of which exceeded 20%. It is shown that binary variables that account for market corrections improve accuracy of the ARMA-GARCH model for asset returns. Among other findings, volatility during market corrections has increased in recent years. The losses of the S&P 500 Growth Index during the market corrections before 2007 were mostly higher than the losses of the S&P 500 Value Index; however, this is not the case since 2007. Corrections in the US equity sector exchange-traded funds are determined by the sector-specific trends rather than by their volatility. The results obtained in this article may be useful for a better understanding of business cycles and optimal portfolio rebalancing among various equity sectors.

TOPICS: Exchange-traded funds and applications, mutual funds/passive investing/indexing

Key Findings

  • • A rule-based definition of market corrections that depends on price volatility is proposed.

  • • The statistics of corrections in several major US equity indexes and sector exchange-traded funds is compiled.

  • • It is found that the binary variables that account for market corrections improve accuracy of the ARMA-GARCH model for asset returns.

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The Journal of Beta Investment Strategies: 13 (4)
The Journal of Beta Investment Strategies
Vol. 13, Issue 4
Winter 2022
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Corrections in the US Equity Indexes and Sector Exchange-Traded Funds
Anatoly B. Schmidt
The Journal of Beta Investment Strategies Feb 2020, jii.2020.1.082; DOI: 10.3905/jii.2020.1.082

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Corrections in the US Equity Indexes and Sector Exchange-Traded Funds
Anatoly B. Schmidt
The Journal of Beta Investment Strategies Feb 2020, jii.2020.1.082; DOI: 10.3905/jii.2020.1.082
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  • Article
    • Abstract
    • THE ARMA-GARCH MODEL WITH THE MARKET CORRECTION STATE
    • CORRECTIONS FOR ^GSPC AND ^IXIC
    • CORRECTIONS FOR ^SVX AND ^SGX
    • CORRECTIONS FOR THE US EQUITY SECTOR ETFs
    • CONCLUSIONS
    • ADDITIONAL READING
    • ACKNOWLEDGMENTS
    • APPENDIX
    • REFERENCES
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