Analysing the disruptive effect of economic downturns on stock market crashes in European financial markets

Abstract

PURPOSE: Earlier this year in March, European financial markets faced a financial crisis generated by security incidents in America ending with the failure of Silicon Valley and Signature Bank. This was a time when the intervention of guarantee bodies was needed to temper the financial shock.

DESIGN/METHODOLOGY/APPROACH: The methods consist of quantifying the analyses’ effects of the economic slowdown on stock market prices by identifying the risk of a stock market crash through an analysis of stock market prices in Frankfurt, Paris, Madrid, Milan and Amsterdam. As a result, we proposed five new econometric models regarding risks on financial markets.

FINDINGS: We appreciate that uncertainty conditions manifest a direct influence on economic deceleration, there is a knock-on effect of the main drivers of uncertainty, hyperinflation, rising interest rates, economic deceleration and financial quotes of companies traded on financial markets. The effects of the financial shock manifested itself in the decline of shares of several regional banks such as First Republic Bank, Western Alliance Bancorporation and PacWest Bancorp. There have also been effects in Europe, the biggest being the collapse of the giant Credit Suisse, which was taken over by UBS as a solution to restore confidence in the financial mechanisms of the European markets.

PRACTICAL IMPLICATIONS: The results of the study will highlight the effect of economic stress on the magnitude of price movements and the conditions for triggering stock market crashes.

ORIGINALITY/VALUE: The results of the study will be useful tools for financial decision-makers to increase the level of financial security and could form the basis for changes in the financial strategy of listed entities.