Very large one-day market gains

In a previous article we looked at very large one-day market falls, in this article we will add to the study very large one-day market gains.

First, the following chart plots the very large one-day market gains with the losses for the period 1984-2014. As before, “very large gains” is defined as daily returns over two standard deviations away from the average return; in this case that is over +2.2%.

FTSE 100 Index - very large one-day moves [1984-2014]As can be seen, there is a certain symmetry here: periods of large one-day gains seem to accompany periods of large one-days falls. This is not too surprising – a large bounceback often follows a large fall.

However, the two are not always closely synchronised. For example, although in the 30 years under study 169 days can be defined as very large one-day gains, only 26 of those large-gain days days were on days after large falls. In fact, those 169 large-gain days followed days whose average return was only -0.21% (to be compared with -2.2% which is the minimum threshold for a day to be defined as a very large fall).

It would be good to understand when these periods of higher volatility happen with respect to the prevailing market. The following chart plots the very large one-day moves and superimposes the absolute level of the FTSE 100 Index.

FTSE 100 Index and very large one-day moves [1984-2014]Putting Black Monday in 1987 to one side, from 1984 to 1997 the market displayed relatively few large one-day moves. Their frequency increased from 1997 and saw a particular high frequency during the Asian financial crisis of 1998. An interesting observation is that the frequency of large one-day moves peaks coincident with market bottoms, and not market tops. So, this can be seen in 2003, 2009 and Sep 2011

The following chart is the same as the above, but the periods of increased large one-day move frequency have been highlighted with grey boxes.

FTSE 100 Index and very large one-day moves [1984-2014] b

After the large one-day move

The following chart shows the comparative performance of the market in the 20 days following respectively a large one-day rise or fall. The Y-axis is the percentage move from the close of the index on the day of the large move. For example, by day 5 the index has risen 0.8% above the index close on the day of the large fall.

FTSE 100 average returns in the days after a large move [1984-2014]As can be seen, in the 20 days following a large fall the index has tended to rise strongly and steadily. In the 5 days following a large market rise the index tends to fall back losing some of its one-day gain, but the index then tends to recover and after 20 days has almost regained the level reached by the very large one-day rise.


See also

Other articles on large one-day returns.

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