Chakrabarti sen anatomy of global stock market crashes; an empirical analysis (2012)

This study aims toinvestigate the nature of global stock market dynamics and their association duringthe financial crises between 1998 and 2011.. Thus, Roubini and Mihm2010 prefer to cal

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An Empirical Analysis

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DOI 10.1007/978-81-322-0463-3

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Despite recurrent shocks to the stock market, a disastrous association of stockmarket with the real sector is required to turn our attention to its importance Afterthe great depression of the 1930s, it is the current financial sector crisis including thestock market crash that has particularly caught our attention Only, this time, theseverity and extent of the crash and its effect is deeper and wider since now bothfinancial and real sector, courtesy globalization and technological innovation, standsglobally integrated.

It is said that value and movements of stock market is ultimately determined bythe real sector It has also been expressed in the current historical juncture ofcapitalism that financial sector in general and stock sector in particular exerciseconsiderable control over the real sector Perhaps, both are true Not surprisinglythen and despite the dispute which is the primary causal factor, stock market shiftsand real sectors shifts tend to move concomitantly, positively during the time ofboom and negatively during the bust with each feeding into the other

Notwithstanding this state of affairs, much research has also gone into theendogenous factors that generate dynamics within the stock market independent ofthe real sector Thus it is conjectured that there may be events transpiring in thestock market that may make it implode from within Boom and bubble may thushave to do with events that happen in the stock markets which, given the tech-nological transformation of the last two decades, generates speedy decisions–actions that are not only unpredictable, but may also be what are called irrationalleading to a path dependent trajectory where the herd mentality of following otherstake precedence over the rationally calculating decision of cost-benefit The result

is a non-linear, chaotic, stock market with self-generating fluctuations and terminate equilibrium If the current history of capitalism is about the financialcontrol of stock market, then this endogenously produced cycles bordering onunpredictability and contingency in the stock market only reiterates the unstablenature of the capitalist system per se Moreover, are all of the phases of boom andbubble unique or are there some common factors, such as rising/eroding confi-dence that are linked with the various cyclic phases?

inde-v

Distilling the frontier of the debates on these issues, Gagari Chakrabarti andChitrakalpa Sen produce a fascinating analysis of the history and cause of thecycles of stock market, with particular attention to the current global crisis It willhelp the reader understand the current nuances of stock markets, its dynamics ofbooms and busts and, why, even if we may know about the factor of confidence,the trajectory of cycles may lead to indeterminate outcomes This book is a mustread for those interested in the role of stock market in the current global economiccrisis.

Department of EconomicsUniversity of Calcutta

KolkataIndia

September 15, 2008 did not start as just another day in our lives The world woke

up to the news of the collapse of Lehmann Brothers, the fourth largest investmentbank in the US and Merrill Lynch, another iconic investment bank, was acquired

by Bank of America ‘‘In a period of less than eighteen months Wall Street hadgone from celebrating its most profitable age to finding itself on the bank of anepochal devastation Trillions of dollars in wealth had vanished, and the financiallandscape was entirely reconfigured’’ (Sorkin 2010).1

Stock prices across the globe were on a downhill path throughout the year 2008.But something was terribly wrong this time The ongoing recession soon turnedinto a doomsday situation as the whole world plunged into a full blown financialcrisis What followed were unanticipated and unprecedented memories of theGreat Depression Between October 2008 and March 2009, Dow Jones fell by52.5%, a breath short of the record 54.5% between 1929 and 1931, at the height ofthe Great Depression Dow Jones was not alone in this race to the bottom In 2008,Britain’s FTSE recorded its worst fall, a 31.3%; Shanghai’s stock market recorded

a 65.2% fall, Germany’s DAX fell by 40.4%, SENSEX went down by 51.9% andHong Kong stock market saw a fall of 48.3%.2For all who believed that the goodtimes will never end, were in for a very, very rude shock As the stock marketplunged worldwide, the worst nightmare of investors started coming true As themarkets fell, then stopped as if catching a breath to its long way down and then fellagain, the age old beliefs and rationales about the market that the market knowsbest started crumbling down all over Best put in the words of Alan Greenspan,

‘‘the whole intellectual edifice, however, collapsed…’’.3As investors and traderssaw the markets come crashing worldwide, economists and researchers,

1 Sorkin A (2010) To big to fail Penguin, India.

2 Record stock market falls in 2008 http://bbc.co.uk/news/world/asia_pacific/ Accessed 24 August 2011.

3 As quoted by Alan Greenspan before the committee of Government Oversight and Reform, October 23 2008 http://clipsandcomments.com/wp-content/uploads/2008/10/greenspan- testimony-20081023.pdf Accessed 24 August 2011.

vii

dumbfounded by the unexpected development, groped for a suitable explanation.And all answers led to one direction … a prolonged misinterpretation of themarket behavior, which stood firmly on the traditional belief of the market’srationality The stock market collapse had a severe ramification on not only otherfinancial markets but also on people’s lives As by-products of the crisis, millionswere soon jobless, homeless and suddenly poor all over the world Everybodystarted believing that the ‘‘invisible hand’’ was dead.

Under these circumstances, it becomes important both on part of a researcherand a policy maker to understand what actually causes the turbulence This bookaddresses the dynamics of stock prices and investigates into its underlying char-acteristics with focus on the last two stock market cycles This study aims toinvestigate the nature of global stock market dynamics and their association duringthe financial crises between 1998 and 2011 It identifies two stock market cycles,the first between 1998 and 2003 and the second between 2006 and 2011 Thesecond cycle has been more global in nature Also, several structural breaks areidentified during each cycle, for each market The breaks in 2007 and especially in

2008 have been largely global in nature, hinting toward a dynamic interlinkageamong the markets The study delves deeper and finds evidence of latent structures

in the global stock market around the stock market cycles Some degree of internalassociation among the markets is also found to be present Finally, the studyinvestigates any possible chaotic nature of the stock markets Results reveal amajority of the markets to be chaotic and all of them being deterministic in nature.This is likely to establish, particularly during the years of the global financialcrisis, the inefficacy of the traditional asset pricing models as well as traditionalpolicy tools which largely assume linearity

Finally, the authors would like to thank Springer Briefs for publishing themanuscript and the anonymous referees for their valuable comments However, it

is us who should be held responsible for any flaw in the study

1 Introduction 1

References 4

2 Stock Market Cycles and Volatility Regime Switch 7

2.1 Introduction 7

2.2 Two Significant Stock Market Cycles 8

2.2.1 The First Cycle Revisited 9

2.2.2 The Second Cycle Revisited 9

2.2.3 The Peak in the Recent Years 11

2.2.4 Three Peaks and Two Troughs 12

2.3 Detection of Structural Break in Volatility 16

2.3.1 Detection of Multiple Structural Breaks in Variance: The ICSS Test 17

2.3.2 Volatility Breaks in Global Stock Market 19

References 24

3 Crises and Latent Structure in the Global Stock Market 27

3.1 Introduction 27

3.2 Exploring the Latent Structure in the Global Stock Market 28

3.2.1 Methodology 28

3.2.2 Result for Sub-Period 1 (1998–2005) 30

3.2.3 Result for Sub-Period 2 (2006–2011) 32

3.3 Analysis of Intra-Regional Association 34

3.3.1 Methodology: Granger Causality 34

3.3.2 Methodology: Dependence Analysis 36

3.3.3 Results for Phase 1 36

3.3.4 Results for Phase 2 37

3.4 The Latent Structure and the New Issues Arising 43

References 46

ix

4 Global Stock Market, Knife-Edge Stability and the Crisis 49

4.1 Introduction 49

4.2 Methodology 51

4.2.1 BDS Test 52

4.2.2 The State-Space Reconstruction 54

4.2.3 Mutual Information Criterion: Finding s 55

4.2.4 False Nearest Neighborhood: Decide the Optimal m 55

4.2.5 Determinism Test 56

4.2.6 Maximum Lyapunov Exponent 57

4.3 Results 57

4.4 The Dynamics of Global Stock Market: The Emerging Issues 60

References 61

Antibiotic Discovery and Development

ISBN 978-1-4614-1399-8 e-ISBN 978-1-4614-1400-1

DOI 10.1007/978-1-4614-1400-1

Springer New York Dordrecht Heidelberg London

Library of Congress Control Number: 2011941801

© Springer Science+Business Media, LLC 2012

All rights reserved This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York,

NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis Use in connection with any form of information storage and retrieval, electronic adaptation, computer software,

or by similar or dissimilar methodology now known or hereafter developed is forbidden.

The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identifi ed as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights.

While the advice and information in this book are believed to be true and accurate at the date of going to press, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made The publisher makes no warranty, express or implied, with respect

to the material contained herein.

Printed on acid-free paper

Springer is part of Springer Science+Business Media (www.springer.com)

A strong case can be made that up to this point among the most important scientifi c achievements in history has been the discovery and development of antibiotics to treat bacterial infections During most of human history, the number one cause of death was infection The leading killer in the pre-antibiotic era was essentially con-quered by the advent of antibiotics and average human lifespan increased dramati-cally Most of us do not concern ourselves to a great extent with bacterial infections that would have terrifi ed people less than one hundred years ago Bacterial diseases have altered history from pneumococcal pneumonia to bubonic plague to tuberculo-sis all killing untold millions in their process In the last century, an assortment of pills and injections has often turned the tide in the favor of the infected host and vanquished the pathogen Sometimes it is diffi cult to recall just how grim infectious diseases were prior to introduction of antibiotics As Lewis Thomas put it in his book The Youngest Science: Notes of a Medicine Watcher [1]: “For most of the infectious diseases on the wards of Boston City Hospital in 1937, there was nothing that could be done beyond bed rest and good nursing care.” He notes that with the introduction of the fi rst antibiotics “The phenomenon was almost beyond belief Here were moribund patients, who would surely have died without treatment, improving within a matter of hours and feeling entirely well within the next day.” The arrivals of these “wonder drugs” also signaled the rise of the pharmaceutical industry and have been lucrative products for these companies, remaining a 30 bil-lion dollar business today However, unlike most other therapeutic areas, antibiotics essentially have built-in obsolescence, as pathogens have become resistant both through mutations and through a number of often clever genetic exchange mecha-nisms Drug resistant bacteria are on the rise, and in some cases, the options for effective treatment are very narrow Healthcare-associated infections are at the fore-front of resistance problems, with multiply resistant pathogens that are increasingly problematic to eradicate with current therapy Further, resistant infections have escaped the hospital In the US, MRSA infects >94,000 and kills >19,000/year., a toll that exceeds deaths due to AIDS Antibiotics are also unusual because there is a societal aspect to their use Unlike most other disease treatments, the use or misuse

of an antibiotic has a much broader impact on individuals beyond the immediate patient The loss of effectiveness, due to the spread of resistance impacts all of us Thus far, in most cases, humans have been able to keep ahead of the rapidly evolving resistant microbes However, the question remains very much open whether this will continue indefi nitely or whether will we fi nd ourselves heading back towards pre-antibiotic times The IDSA issued their “Bad Bugs, No Drugs” report

in 2004 [2], outlining the critical nature of the situation and the urgent need for new antibiotics to address multiply resistant pathogens More recently, they have issued their ten new drugs by 2020 initiative [3], which spans across many key stakeholder groups However, during the 1990s and 2000s, several large pharmaceutical compa-nies either eliminated or downsized their antibacterial discovery efforts At the same time and partly as a consequence, the number of newly marketed antibacterial drugs has also fallen Some smaller companies have entered into this area, but the number

of researchers trained in antibiotic discovery and development has greatly reduced

as compared to the peak levels in the last century At a time when the medical need for new antibiotics is increasing, there is less effort and fewer people trained and committed to the task

While there are already many excellent texts that list the various antibiotic classes and their properties or explore mechanisms of action or mechanisms of resistance, the goals we set out to achieve in this book are different Our aim was to provide the reader with a broad-based yet in depth perspective of the fi eld of discovering and developing antibiotics We asked ourselves the following question: what knowledge would be important for a newcomer to the fi eld? What would a seasoned antibiotic drug hunter also fi nd useful to have at hand? These were the questions we sought to address in assembling the overall book outline and recruiting expert chapter authors

In this volume, the intention is to attempt to capture the antibiotic discovery and development process and provide the reader with a sense of how it is done and where things stand in 2011

The book begins with a solid historical review of the early years of antibiotic discovery & development (often referred to as “The Golden Years”) It is important

to appreciate the early efforts and techniques employed to fi nd new antibiotics in the mid-twentieth century Many readers may fi nd themselves surprised at the sophisti-cation of screening methods employed 30 or 40 years ago From that starting point, the book highlights the evolution of many of the individual classes of drugs in clini-cal use discovered during that time In addition, there has been considerable effort recently to rejuvenate existing classes to address specifi c resistance problems, and these chapters also refl ect that work As a result, the individual drug chapters span examples of early compounds right up to the latest developments in each class In some cases, separate chapters are presented on the prominent resistance mecha-nisms to individual drug classes as well as a review of the multi drug resistant effl ux pumps, which are particularly problematic for Gram-negative bacteria We also wanted to devote several chapters to the “worst offenders”; that is problem patho-gens that are particularly challenging to current antimicrobial therapy In this con-text, it is also important to appreciate the vast array of resistance mechanisms that different microbial pathogens have acquired and adopted

Having set the stage with existing classes of compounds and problematic pathogens, the next aspect the book addresses is the drug discovery process and areas to be considered when identifying novel antibiotics Two rather unique chapters address the issues of chemical and physical properties identifi ed in current antibiotics and the challenge of antibiotic penetration through the several membrane barriers enroute to the target in the bacterial cell There is also a chapter devoted to the important area of natural products, a major source of current antibiotic classes and the future of such efforts Next, approaches to discovering novel antibiotics is cov-ered, including genomic identifi cation of targets, principles of enzymatic screening

to identify potential leads, and the use of cell-based screens to identify inhibitors The role of both NMR and X-ray structure techniques in identifying inhibitors, mechanism of action studies, and their utility in refi ning compounds are covered in two chapters The chapter on a recent novel antibiotic program, the identifi cation of

an FtsZ cell division inhibitor, is presented as an excellent example of the process of modern antibiotic discovery

Equally important to the refi nement of lead interaction with the target and bial inhibition is the issue of demonstrating effi cacy in model animal infections In this chapter, many of the standard animal infection models are described, along with the type of data generated and its interpretation, and the role of pharmacokinetics and pharmacodynamic models in infection research are addressed in their own chapter

Finally, we round out the topics with a chapter on antibiotic resistance lance, an important area for anticipating what future resistance trends may be There

surveil-is also a chapter on the late stage development process for antibiotics; the types of studies necessary for the Regulatory authorities, and the process of submitting the documentation to place a new antibiotic on the market

We were extraordinarily fortunate to have enlisted some of the leading scientists

in the fi eld from both industry and from academia to share their knowledge and experience We are profoundly grateful for the encouraging responses we received from these individuals and their willingness to participate in this effort The chap-ters we received were all extremely thoughtful and of high caliber Without their contributions, this volume simply would not exist Our hope is that the reader will learn and benefi t from the information in this volume and that it will serve as a valu-able reference source for antibiotic investigators, present and future

References

1 L Thomas (1995) The youngest science: notes of a medicine-watcher Penguin, New York

2 http://www.idsociety.org/WorkArea/linkit.aspx?LinkIdentifi er=id&ItemID=5554

3 The 10x20 Intiative: Pursuing a Global Commitment to Develop 10 New Antibacterial Drugs by

2020 Clin Inf Diseases 50: 1081–1083 2010

VOLUME I Part I Introductory History of Antimicrobial Drugs

1 The Early History of Antibiotic Discovery:

Empiricism Ruled 3Richard J White

2 Rational Approaches to Antibacterial Discovery:

Pre-Genomic Directed and Phenotypic Screening 33Lynn L Silver

Part II Marketed Major Classes of Compounds

3 Beta-Lactam Antibiotics 79Malcolm G.P Page

4 Review of the Quinolone Family 119George A Jacoby and David C Hooper

5 Tetracyclines 147Patricia A Bradford and C Hal Jones

6 Macrolides and Ketolides 181Ze-Qi Xu, Michael T Flavin, and David A Eiznhamer

7 Aminoglycosides 229Eliana S Armstrong, Corwin F Kostrub, Robert T Cass,

Heinz E Moser, Alisa W Serio, and George H Miller

8 Oxazolidinone Antibacterial Agents 271Michael R Barbachyn

9 Glycopeptides and Lipoglycopeptides 301F.F Arhin, A Belley, A Rafai Far, D Lehoux, G Moeck,

and T.R Parr Jr

Part III The Rise of Antibiotic Resistance/Resistance

Mechanisms to Major Classes

10 Effl ux-Mediated Antimicrobial Resistance 349Keith Poole

11 Structural Mechanisms of b-Lactam Antibiotic Resistance

in Penicillin-Binding Proteins 397Robert A Nicholas and Christopher Davies

12 Evolution of b-Lactamases: Past, Present, and Future 427

Karen Bush

13 Inducible Resistance to Macrolide Antibiotics 455Sai Lakshmi Subramanian, Haripriya Ramu,

and Alexander S Mankin

14 Fluoroquinolone Resistance: Mechanisms,

Restrictive Dosing, and Anti-Mutant Screening

Strategies for New Compounds 485Karl Drlica, Xilin Zhao, Muhammad Malik, Tal Salz,

and Robert Kerns

15 Glycopeptide Resistance 515Bruno Périchon and Patrice Courvalin

16 Acquired Tetracycline Resistance Genes 543Marilyn C Roberts

Part IV Clinical Issues of Resistance: “Worst Offenders”

List of Problematic Microbes Gram-positives

17 Evolution of Molecular Techniques for the Characterization

of MRSA Clones 571Duarte C Oliveira, Hermínia de Lencastre,

and Alexander Tomasz

18 Mechanisms of Penicillin Resistance

in Streptococcus pneumoniae: Targets, Gene Transfer

and Mutations 593

Regine Hakenbeck, Dalia Denapaite, and Patrick Maurer

19 Clinical Aspects of Multi-Drug Resistant Enterococci 617German A Contreras and Cesar A Arias

Part V Gram-negatives

20 Clinical Issues of Resistance: Problematic Microbes:

Enterobacteriaceae 651

David F Briceño, Julián A Torres, José D Tafur,

John P Quinn, and María V Villegas

21 Pseudomonas aeruginosa: A Persistent Pathogen

in Cystic Fibrosis and Hospital-Associated Infections 679

Kristen N Schurek, Elena B.M Breidenstein,

and Robert E.W Hancock

Part VI Mycobacteria

22 Drug Resistant and Persistent Tuberculosis:

Mechanisms and Drug Development 719

Ying Zhang

VOLUME II Part VII Antibiotic Discovery

23 Resistance Trends and Susceptibility Profi les

in the US Among Prevalent Clinical Pathogens:

Lessons from Surveillance 753Chris Pillar and Dan Sahm

24 Chemical Properties of Antimicrobials

and Their Uniqueness 793Mark J Macielag

25 Natural Products in the 21st Century 821Sheo B Singh

26 Permeability of Bacteria to Antibacterial Agents 849Wright W Nichols

27 Novel Antibacterial Targets/Identifi cation of New Targets

by Comparative Genomics 881Sarah M McLeod, Thomas J Dougherty,

and Michael J Pucci

28 Cell-Based Screening in Antibacterial Discovery 901

Scott D Mills and Thomas J Dougherty

29 Enzyme-Based Screens in HTS 931David E Ehmann and Stewart L Fisher

30 Antibacterial Inhibitors of the Essential Cell

Division Protein FtsZ 957Lloyd G Czaplewski, Neil R Stokes, Steve Ruston,

and David J Haydon

31 Structure-Guided Discovery of New Antimicrobial Agents 969Molly B Schmid

32 NMR in Infection Research 985Jun Hu and Gunther Kern

33 A Review of Animal Models Used for Antibiotic Evaluation 1009

Andrea Marra

34 In Vivo Pharmacodynamic Modeling for Drug Discovery 1035

Jared L Crandon and David P Nicolau

35 Applications of Pharmacokinetic/Pharmacodynamic

Models for the Development of Antimicrobial Agents 1055

April Barbour and Hartmut Derendorf

Part VIII Antibiotic Drug Development

36 Antibiotic Drug Development: Moving Forward

into the Clinic 1071

Jane E Ambler and Greg G Stone

Part IX The Economics and Incentives of Antibiotic Drug Discovery

37 Stimulating Antibacterial Research and Development:

Sense and Sensibility? 1103

Steven J Projan

Index 1107

German A Contreras Division of Pediatrics Infectious Diseases , University of Texas Medical School at Houston , 6431 Fannin Street, MSB 3.001 Houston ,

David J Haydon Prolysis Ltd , Begbroke Science Park Sandy Lane, Yarnton Oxfordshire OX5 1PF , UK

David C Hooper Division of Infectious Diseases , Massachusetts General Hospital ,

55 Fruit Street Boston , MA 02114, USA

Jun Hu AstraZeneca Pharmaceuticals , 35 Gatehouse Drive Waltham , MA

02451, USA

George A Jacoby Lahey Clinic , 41 Mall Road Burlington , MA 01805, USA

C Hal Jones Wyeth Research , 401 N Middletown Road, Pearl River , NY

Mark Macielag Johnson & Johnson Pharmaceutical Research & Development ,

776 Welsh & McKean Roads Spring House , Pennsylvania , 19477-0776, USA

Muhammed Malik Public Health Research Institute , New Jersey Medical School, UMDNJ , 225 Warren Street, Newark , NJ 07103, USA

Alexander S Mankin Cntr Pharm.Biotech – m/c 870 , University of Illinois , 900

S Ashland Ave., Rm 3052, Chicago , IL 60607, USA

Andrea Marra Rib-X Pharmaceuticals, Inc , 300 George Street Suite 301 New Haven , CT 06511, USA

Patrick Maurer Department of Microbiology , University of Kaiserslautern , Paul Ehrlich Str 23 , Kaiserslautern , D-67663, Germany

Sarah M McLeod AstraZeneca Pharmaceuticals , 35 Gatehouse Drive Waltham ,

Robert A Nicholas Department of Pharmacology , University of North Carolina , Chapel Hill , North Carolina , 27599, USA

Wright W Nichols AstraZeneca Pharmaceuticals , 35 Gatehouse Drive Waltham ,

John P Quinn Pfi zer Global Research and Development , Groton , CT 06340, USA

Haripriya Ramu Center for Pharmaceutical Biotechnology , University of Illinois ,

900 South Ashland Avenue Chicago , IL 60607, USA

Marilyn C Roberts Department of Environmental and Occupational Health Sciences School of Public Health , University of Washington , Seattle , WA

Tal Salz Public Health Research Institute New Jersey Medical School, UMDNJ ,

225 Warren Street Newark , NJ 07103, USA

Kristen N Schurek Centre for Microbial Diseases & Immunity Research , University of British Columbia , 2259 Lower Mall Vancouver British Columbia , V6T 1Z4, Canada

Molly B Schmid Keck Graduate Institute , 535 Watson Drive Claremont , CA

91711, USA

Lynn Silver LL Silver Consulting, LLC , 955 S Springfi eld Ave., Unit C403 Springfi eld , NJ 07081, USA

Sheo B Singh Merck Research Laboratories , Rahway , NJ 07065, USA

Neil R Stokes Prolysis Ltd , Begbroke Science Park Sandy Lane, Yarnton Oxfordshire, OX5 1PF , UK

Gregory G Stone AstraZeneca Pharmaceuticals , 35 Gatehouse Drive Waltham ,

MA 02451, USA

Sai Lakshmi Subramanian Center for Pharmaceutical Biotechnology , University

of Illinois , 900 South Ashland Avenue Chicago , IL 60607, USA

Jose D Tafur International Center for Medical Research and Training (CIDEIM) , Cali , Colombia

Alexander Tomasz Laboratory of Microbiology , The Rockefeller University , New York , NY 10065, USA

Julian A Torres International Center for Medical Research and Training (CIDEIM) , Cali , Colombia

Maria V Villegas International Center for Medical Research and Training (CIDEIM) , Cali , Colombia

Richard J White Half Moon Bay Biotechnology Consulting , Half Moon Bay , CA

94019 , USA

Ze-Qi Xu Advanced Life Sciences, Inc , Woodridge , IL 60517, USA

Ying Zhang Department of Molecular Microbiology and Immunology Bloomberg School of Public Health , Johns Hopkins University , Baltimore , MD 21205, USA

Xilin Zhao Public Health Research Institute , New Jersey Medical School, UMDNJ ,

225 Warren Street Newark , NJ 07103, USA

The charm of history and its enigmatic lesson consist in the fact that, from age to age, nothing changes and yet everything is completely different.

Aldous Huxley

Looking back into history, financial crises have always been the norm, rather thanexceptions Starting from the Tulip Mania in 1630, economic and financial vul-nerabilities have generated waves of financial crises in the world economy Not allthe crises, by nature, however have been the same; rather they came in differentforms and had different origins While some of these remained confined to thedomestic or regional boundaries, most of them reverberated, in no time, from theperipheries to the center with an ultimate devastating impact on the real economy

In this newfangled knowledge-driven financially integrated era such speedy spread

of crisis is almost inevitable The financial crises of early days, for example, those

in France and Britain during the latter half of the 1710s remained confined to theregional territory The first significant global crisis has probably been the panic of

1825 that initiated in Britain and eventually spread to the markets of Europe andLatin America Since then, the global economy collapsed many a times Panicspread from the US to countries of Europe, Asia and Africa in 1857 Apart fromsome regional crises in 1819, 1837, 1866 and 1893, global economy witnessedcatastrophic crashes in 1873, 1907 and most importantly, in 1929 The debt crisesduring the 1980s and the Internet bubble during the last few years of the twentiethcentury were followed by a global financial meltdown that was on track since mid

2007 This crisis has often been described as the worst financial crisis since the onerelated to the Great Depression of the 1930s

Financial crises are often seen as ‘‘Black swan’’: events that are fatal butimprobable and extremely difficult, if not impossible, to predict (Taleb2007) There

is then, no single path that financial crises could follow However, treating financialcrises as ‘‘Black swan’’ ignores the fact that although the crisis gearing mechanismdiffers from one crash to another, they have much in common Almost all crises arecrises of confidence that begin when an initial boom turns into a bubble But, whatmakes a boom take on the path of a bubble? A silver line does have its clouds and

(Huxley A (1952) The devils of Loudun Chatto and Windus, London 259)

G Chakrabarti and C Sen, Anatomy of Global Stock Market Crashes,

SpringerBriefs in Economics, DOI: 10.1007/978-81-322-0463-3_1,

 The Author(s) 2012

1

each boom brings into its train a potential bubble A typical bubble begins with a

‘precipitating factor’ such as development of a new product, process or a theory thatseems unique to the investors This is usually followed by an ‘amplificationmechanism’ generally in the form of assertions from media and like institutions thatreinforce the view and the resulting stock price hike that convinces the investorsabout the emerging opportunities (Farlow2002) People coming from almost everysegment of society—from the business magnets to small investors; from theresearchers and economists to the nonchalant observer of the economy seem to keepfaith on the four most dangerous words in finance—‘‘this time is different’’.Investors start believing that the traditional rules no longer apply, the current pricerise is different from bubble, the market is flawless, and most importantly, the boomwill continue even in the presence of irrational exuberance The initial increasegenerates expectations of further increase and attracts new buyers—normallyspeculators The rule of the game now becomes ‘momentum’—stay close to theherd and track everyone else Rational investors who realize that ‘‘not all of it islegal and not all of it is wealth’’ (Varian2003) are crowded out or find it difficult tobet against the bubble to stop it in its track The bubble bursts when the initialeuphoria turns into retreat and triggering of a wreck usually have ‘‘no triggeringnews event…much of the drama of the market lies in its short term gyration’’(Siegel2000) The bubble bursts because stocks are going down as investors startselling them and people are selling them because stocks are going down; therebyinitiating the crisis The irrational exuberance in no time turns into irrationaldepression, ‘‘scarcely any one knows whom to trust’’ (Bagehot1873) Regardless ofhow the upward journey is initiated or how people rush to join the speculativemania, the story repeats itself in all the financial crises Thus, Roubini and Mihm(2010) prefer to call financial crises a ‘‘white swan’’: the fact that a crisis is loominglarge might well be predicted but the daunting task is to stop it in its track.The ultimate devastating impact of any financial crises on the real economy hasinstigated researchers to explore the dynamics of the global stock markets, par-ticularly, the possible dynamic inter-linkages (or, channels of contagion) amongthem Moreover, the time is ripe to check whether global financial markets areinherently unstable which is why crashes are rules rather than aberrations Thisstudy is a work that seeks to concentrate on this particular issue

This study considers a period when the global economy has already beentransformed into the so-called ‘‘new economy’’ The study has analyzed the sig-nificant crises that broke out in this knowledge-driven, knowledge-based andhighly integrated global economy Over a period of thirteen years, from 1998 to

2011, the study isolates two major crises that ultimately assumed global dimensionhaving terrifying spill-over into the real economy The first one (during1999–2000) relates to the Internet bubble and the second one (during 2007–2008)has often been referred to as the worst financial crisis ever, since the one related tothe great depression of 1929 The study is based on thirty stock markets from allover the globe The market capitalization weighted bench market indexes that arerepresentative of their own economy have been selected from each of thesemarkets From the North American Region, the study selects Dow Jones 30, S&P

500 and NASDAQ (US), Mexico IPC (Mexico) and S&P/TSX (Canada) From theEuropean Region, the study selects CAC-40 (France), DAX (Germany), FTSE 100(London), ATX (Austria), Madrid General (Spain), AEX General (Netherlands),Swiss Market (Switzerland), Bel20 (Belgium), OSE All Share (Norway), andStockholm General (Stockholm) All Ordinaries Index (AORD) and NZSE 50 arechosen from Australia and New Zealand, respectively MerVal (Argentina) andBovespa (Brazil) are selected from the South American Region From the AsianRegion, the study picks BSE SENSEX (India); Shanghai Composite (China),Nikkei 225 (Japan), Hang Seng (Hong Kong), Straight Times (Singapore), Jakartacomposite (Jakarta), KLSE composite (Malaysia), TWII (Taiwan) and SeoulComposite (Korea) CMA (Cairo) and TA100.TA (Tel Aviv) are considered fromthe Middle East and African countries.

While analyzing the nature of financial crisis in this ‘‘new economy’’ the studydeals with some specific issues Particularly, it seeks to answer the following set ofquestions:

• What has been the nature of stock price movements around the different stockmarket cycles?

• Is it possible to differentiate between any crisis that remains confined to theregion and those which take up a global dimension?

• Is it possible to trace out presence of intra-regional and inter-regional tion and/or global financial integration? And, if so, what is the source and nature

There have been some studies that have explored some of these issues albeit in

an isolated manner An empirical analysis at the global level addressing all suchissues, particularly in the context of recent financial meltdowns, is howeverlacking in the field In an earlier attempt, Chakrabarti (2010a,b) tried to analyzethe dynamics of global market in terms of the crisis of 2007–2008 only The focus

of the study was essentially volatility transmission mechanism around the recentcrisis period The present study is a comprehensive, analytical study (instead ofbeing theoretical only) into different stock market cycles, a comparison of theircharacteristics, the nature of inter-regional and intra-regional associations aroundthe different cycles and the possible source of crises into the intrinsic nature of theglobal stock market dynamics, thus trying to fill the void in literature

After this introductory chapter, the trajectory of the study will be as follows:

cycles Starting from a simple analysis of price movements it explores the globaltrends around these cycles and traces out the possible presence of intra-regional andinter-regional association and/or global financial integration The possible intrinsic

inter-relationship among global stock markets is then analyzed in a more technicalway where the chapter explores whether and how the markets have passed throughdifferent volatility regimes across the cycles To make it more interesting, thechapter inquires further whether volatility break dates coincide or at least followsome lead-lag relationship across markets.

constituent markets in different categories Such market segmentation and parison of the nature of latent structure around the cycles are useful in analysis ofthe nature and the extent of financial integration After identifying the latentstructure, the rest of the chapter seeks to address the following issues:

com-• Does any regional shock lead to or transmit into global shock? If so, what are thechannels through which shocks reverberate from periphery to the center?

• In case of a purely regional shock, how do the stock markets within the regionbehave?

• In case of a global shock, what is the nature of inter-regional and intra-regionalstock market dynamics?

• Finally, what is the source of volatility in these markets? Can the variability in aparticular market be attributed to the variability of the other markets to which it

is associated? Or, is it really the case of volatility being largely endogenous and

a manifestation of the inherent instability or at best, of the knife-edge stability ofany market?Chapter 4deals with this issue in detail

unpredictability, disorder and discontinuities are inherent and not aberrations Thischapter follows the line of a growing body of literature and inquires the possiblenon-linear, particularly chaotic nature of the global stock markets A chaoticsystem lacks any determinate equilibrium and is characterized by non-periodiclimit cycles where fluctuations might be self-generating and endogenous to thesystem Hence, in a chaotic stock market no external shock will be required to gearfinancial crisis at regular intervals which, in an integrated financial world, willreverberate across the globe in no time

The study concludes by pointing toward the implications of the findings atinvestment and policy level

Siegel JJ (2000) What triggered the tech wreck? none of the usual suspects ble.com Accessed 5 May 2004

http:\\www.bub-Taleb NN (2007) The black swan: the impact of the highly improbable Random House, New York

Varian HR (2003) Economics of information technology University of California, Berkeley http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.8.3508&rep=rep1&type=pdf Accessed 23 Mar 2005

Introductory History

of Antimicrobial Drugs

Stock Market Cycles and Volatility

Regime Switch

The highest degree of prosperity … suddenly … plunged into embarrassment and distress.

Martin Van Buren

Abstract This chapter initiates the empirical dissection of stock market crises by ananalysis of price movements and isolates two prominent stock market cycles overthe study period While the first cycle occurred during 1998–2005, a discerniblesecond cycle took place from 2006 to 2011 The chapter analyzes the global trendsaround these cycles and explores the possible presence of intra-regional and inter-regional association and/or global financial integration The intrinsic nature ofdifferent crises is further analyzed and compared in terms of volatility regime switchmodels where we inquire whether financial crises inevitably take the form of astructural break and whether such breaks follow some discernible pattern across themarkets The second cycle, rather than the first one appears to be truly ‘global’ and ismarked by strong financial integration at the global level Regional associations arehowever, not so robust The association between financial crises and volatilitybreaks has been ambiguous and has varied from cycle to cycle Such associationshave been stronger over the second cycle where financial market changes havealmost taken the form of volatility regime switch

Keywords Financial crises Stock market cycle  Structural break  VolatilityregimeICSS test Dynamic interlinkage

2.1 Introduction

The boom-slump cycle of the stock market has been as old as capitalism itself.The fact that, boom-bust cycles had remained and will remain, however, hardlypermits one to take these for granted In reality we cannot afford to ignore such

Martin van Buren, address to Special Session of Congress, 4 September 1837 http://presidency ucsb.edu/ws/index.php?pid=67234 Accessed 13 February 2007.

G Chakrabarti and C Sen, Anatomy of Global Stock Market Crashes,

SpringerBriefs in Economics, DOI: 10.1007/978-81-322-0463-3_2,

 The Author(s) 2012

7

cycles due to their potential threat to the financial markets as well as to thebroader economy A boom turns into a bust as ‘‘irrational exuberance’’ loses fueland triggers massive panic leading sometimes to global financial meltdown Agrowing body of literature emphasizes that the origin of such cycles might differbut the path followed by the global market during each of these cycles hasremained the same Every time, sheer lack of confidence and panic have over-shadowed the initial euphoria and made the market struggle and plunge Withinthis broad trend, however, it might be of relevance to trace the regional trends.Particularly, an exploration of whether and how the dynamics of and interlink-ages within the global market change as it approaches a peak, slides from it andrecovers could be of interest A related and equally important issue could be anexploration of whether all the markets, irrespective of their levels of financialdevelopment, move similarly over different phases of stock market cycles This

is specifically what this chapter probes into

The empirical anatomy of global market dynamics starts from a simpleintrospection of stock market movements The study initiates by exploring thestock price movements across the different stock market cycles and seeks totrace possible presence of intra/inter regional association and/or global financialintegration Apart from such simple analysis of stock price movements, the studywill explore the presence of volatility regime switch in stock markets across theglobe Specifically it will identify different volatility breaks in individual stockmarkets and will attempt to explore whether such volatility break dates arecommon across markets This is particularly important because, any financialcrisis is often considered as a switch in ‘regime’ that often manifests itself in astructural break in the market volatility It would thus be interesting to explorewhether the financial crises are necessarily associated with a volatility break orwhether regime switches necessarily lead to financial crises Moreover, this willhelp us analyze and compare the intrinsic nature of the different stock marketcrises The possible inter-relationship among the global markets could beeffectively analyzed by examining whether volatility break dates coincide or atleast follow some lead-lag relationship across markets

2.2 Two Significant Stock Market Cycles

Simple introspection of stock prices reveals the presence of three significantpeaks and two significant troughs in the global market over the period from 1998

to 2011 In this study, the peaks are dates on which the market reaches a localmaximum and troughs are those on which any market hits its local minimum interms of price On the basis of price movements, the study isolates two significantstock market cycles in the global stock market While the first cycle occurredfrom 1998 to 2003, the second cycle covered the period of 2006 to 2011

2.2.1 The First Cycle Revisited

Analysts might find it difficult to label the first cycle as ‘truly’ global because of itsfailure to have an all-embracing impact on the global stock market Out of thethirty markets selected, the cycle remained significant in only twenty of them Thecrisis failed to hit the African (Cairo) and the Middle East (Tel Aviv) markets, andthe Asia–Pacific markets such as Australia, New Zealand and Indonesia couldavoid the heat of this cycle A few markets from the European region (such asAustria, Oslo and Stockholm) and the American region (such as Mexico andArgentina) too managed to escape the crisis The impact of the cycle, however, hasbeen tremendous on the markets on which it hit hard In six out of these twentymarkets, affected intensely by the crisis, the peak-price attained during the cyclehas remained the all-time high For these six markets of Taiwan, Japan, UK,France, Austria and the US (NASDAQ only) the first cycle brought aboutincredible prosperity that could not be outshined even in the next 13 years.Moreover, the slump associated with the cycle has been the all-time dip for fifteenout of these twenty markets It has been the worst crisis that these economies haveseen The journey towards the first peak was initiated by the European markets.The Swiss market was the first to reach the peak in July 1998 followed by Belgiumthat reached the summit in January 1999 Specifically, it is since December 1999that markets starting from the London stock market began to reach their respectivepeaks one after another However, it is difficult to trace out any regional pattern inthis movement The process of reaching peaks continued for a sufficiently longperiod of time It took almost four and a half years (from July 1998 to April 2002)for all the markets to reach their respective peaks The process of reaching thetrough had been more of a global phenomenon rather than a regional one Themarkets started hitting their slumps since April 2002 Within a short span of oneyear all the twenty markets reached their respective trough Out of these twentymarkets, three hit their slumps in September–October 2001 In October 2002, sixmarkets touched their minima with five (including the three US indexes) of themreaching slump simultaneously on 9 October 2002 The nose-diving completed inMarch–April 2003, when eight markets hit their slumps Of these eight markets,five from the European region touched their lowest on 12 March 2003 Thus, thefirst recession considered in this study has been a truly global phenomenon.However, some regional association might be expected to be present within theEuropean region and among the US markets The peaks and troughs associatedwith the first cycle in global market are shown in Fig.2.1

2.2.2 The Second Cycle Revisited

The second cycle has remained prominent in all the thirty markets selected.For seventeen markets, out of the chosen thirty, prices have been all-time high

around this peak For thirteen markets, prices have been all-time low around theslump Clearly, the prosperity that it brought about was enormous while thedistress that followed was toe-curling As is evident from the dates of reachingthe respective peaks, the European markets (and two Asia Pacific markets) wereonce again to initiate the move The nature of the movement around the secondcycle has been quite different from the first one in the sense that stock marketmovements toward peak were much more ‘global’ in nature In contrast to thefirst cycle, the process of reaching their respective peaks by the stock markets inthe second phase completed within a relatively shorter period of time Theprocess continued for a period of one year starting from May 2007 The marketsreached their respective peaks either simultaneously or within a short span oftime Eleven markets reached their respective peaks within a short span of twomonths starting from May 2007 New Zealand and Belgium reached theirrespective peaks on two consecutive days Switzerland and France reached theirpeaks on the same day (that is on 1 June 2007) Same was the case for theJapan-Austria market pair They reached their peaks on 9 July 2007 Stockmarkets of Stockholm and Germany reached summit on 16 July 2007 Ninemarkets reached their peaks in October 2007 Once again, Dow Jones and S&Preached their peaks simultaneously on 9 October Tel Aviv and Taiwan reachedtheir peak on 29 October NASDAQ, Argentinean and Korean markets reachedtheir respective peaks on 31 October Asian markets attained their individualpeaks in two phases: the first one was in October 2007 and the other one was inJanuary 2008 The process of hitting the slump has been really a globalphenomenon Out of the thirty markets, twenty-one reached their respectiveslumps in March 2009 More interestingly, nine out of these markets touched

Fig 2.1 First peak and first trough in global stock market

their trough on 9 March; five hit slump on 6 March and three dipped on 3 March

2009 Thus, like the first cycle considered earlier, while some regional ation could be expected to exist during the pre-crisis period of this second phase,the recession has been more of a global nature Figure2.2 depicts the secondpeak and second trough in the global stock market

associ-2.2.3 The Peak in the Recent Years

The markets have started recovering since March 2009 They have approachedtheir respective peaks once again in more recent years This is depicted in Fig.2.3.For seven markets, prices have been all-time high around this peak However, due

to lack of sufficient data in recent years, it would be too early to explain it as theinitiation of the third cycle Our study clubs the period from 2009 to 2011 in thesecond phase of stock market movement Simple introspection of stock pricemovement hints toward possible presence of some intra-regional association,

Fig 2.2 Second peak and second trough in global stock market

particularly within the Asian region, European region and the US region Somekind of lead-lag relationship might also be expected to hold.

2.2.4 Three Peaks and Two Troughs

A comparison among the stock prices that the markets attained during theirrespective peaks and slumps might be of interest in this context (Fig.2.4) Thenineteen markets that have passed through both the cycles can be clubbed underthree categories For eleven of them, the second peak has been more significantthan the first one in the sense that prices have been significantly higher around thesecond peak The difference has been maximum for the Indian market Out of theseeleven markets as many as six come from the Asian region For some Europeanmarkets and the S&P index, prices around the two peaks have been more or lessthe same For the remaining markets, the first peak has been more significant

A comparison of the two slumps (Fig.2.5) reveals that prices around the firsttrough has been much lower compared to the second one in most of the markets

On average, prices have been 47% higher around the second trough The difference

Fig 2.3 Third peak in global stock market

Fig 2.4 Price difference between the first and second peaks (in percentage)

Fig 2.5 Price difference between the first and second trough (in percentage)

has been widest for the Indian market (220%) and narrowest for the UK market(6%) Only for five markets, prices around the first trough have been higher thanthe second one On average, prices have been 9.67% lower around the secondtrough, the difference being the widest in case of S&P Thus, for most of themarkets, slump has been deeper in the first cycle.

A comparison of the second peak and the recent peak is shown in Fig.2.6 Formost of the markets, prices around the second peak have been much highercompared to the recent one On average, prices have been higher by 24.8% aroundthe second peak For only eight markets prices were higher (on average by 16%)around the recent peak

Finally, a look at the price difference between a peak and the correspondingtrough might be of interest (Fig.2.7) On average, prices have fallen by 55.34% inalmost 1 year when the markets moved from the first peak to the first trough Thejourney from the second peak to second trough continued for 1 year and wasassociated by a price drop of 57.8% On the basis of price drop while moving from

a peak to trough, countries could be categorized into three For some countries(such as Hong Kong, Singapore, Belgium, India, China, Spain and the US markets)price shedding has been more around the first cycle The reverse is true for themarkets such as Germany, Taiwan, Austria and NASDAQ For few other marketsprice change has been more or less the same around the two cycles

Fig 2.6 Price difference between the second and the recent peak (in percentage)