How the Coronavirus Crash Is Different From the 2008 Financial Crisis
Are investors cashing out en masse?
With the market now 30% off its all-time highs, the same question keeps crossing my mind: How will this crash compare to 2008?
Though the dust from our current crisis has far from settled, I am already seeing a few key differences in asset behavior that makes the coronavirus crash distinct from the 2008 financial crisis. Besides the speed of this decline, asset correlations don’t seem to be following their historical patterns.
For example, during normal times (i.e., times without panic), riskier assets usually have positive return correlations with each other (i.e., their prices move together), and less risky assets also have positive return correlations with each other. However, the risky assets and less risky assets generally show little to no return correlation with one another.
This pattern has been generally true for the past few decades.
We can visualize these correlations during normal times using a network plot where each circle is an asset class and the lines connecting the circles represent strong positive (greater than 0.5) or strong negative (less than -0.5) correlations in daily returns.
