"For the first time in years of quantitative publications, we argue that the usual irrelevant noise of daily fluctuations becomes now immensely informative."
Gavekal Intelligence Software, The Quant Corner, February 2020
Equity markets started 2020 strongly, before cascading violently in the second half of January. The chief suspect for this decline is most unusual, and is commonly known as the ‘coronavirus’, a lethal virus first identified in late December 2019 in the Chinese city of Wuhan.
Epidemics are, first and foremost, human tragedies, as they put human lives at stake. However, they are also catalysts of economic risk.
The number of infected people had, by the 21st of January, reached 282. 10 days later, this number had skyrocketed to 9,826, across 33 Chinese provinces and 25 countries.
The number of infected people is still small, especially when compared to the infection rate of seasonal influenza viruses, which affects between a quarter and half a million people in the world every year. Nonetheless, this new virus commands our attention because of two factors: its fatality rate, which is between 20 and 40 times higher than influenza viruses, and its high transmission rate across humans.
On the financial front, our 20 years of quantitative research on the topics of major risks highlights the clustering of two types of shocks in any complex system: exogenous or endogenous. The former of these leads to rapid crisis but quick recoveries. Endogenous shocks, however, are far unhealthier; they take time to develop and to cure.
An epidemic is a third case, mixing exogenous properties−the economic stress provoked by an outside agent−and endogenous properties−the ability of the stressor to cascade inside the economic system. The outcome, therefore, can randomly be either very limited, or quite to the contrary, disastrous.
For the first time in years of quantitative publications, we argue that the usual irrelevant noise of daily fluctuations becomes now immensely informative.
Epidemic Risk at Start
Epidemics are ‘cascade’ events, like avalanches, which create exponential diffusions of risk. While exponential impacts multiply much faster than linear ones, this is not necessarily clear at start. In this sense, it can be difficult to apprehend the likelihood of catastrophic risk at the beginning of an epidemic.
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