Predicting and Assessing Economic Crises

Abstract: This document constitutes of two theses to fulfil Stockholm School of Economics requirements for the Double Degree Programme in Finance between Stockholm School of Economics (Home School) and Universita` Commerciale Luigi Bocconi (Host School). The first thesis was written, submitted, and defended at Universita` Commerciale Luigi Bocconi in July 2020. It discusses some of the key triggers and key indicators to a potential financial crisis that professionals and authorities have shared with the public. It also estimates the probabilities of upcoming financial crises in selected OECD countries by further developing, validating and applying two existing early warning models using logit regression. Both the quantitative and qualitative results identify multiple vulnerable countries with high risk to enter a financial crisis state in case of another substantial market shock. The second thesis was only submitted to Stockholm School of Economics. It aims to identify key patterns in the developed Europe stock market during the crash in March 2020 and the following recovery by comparing the performance of developed Europe national benchmarking indices and sector indices to the US stock market and to the performance during the Global Financial Crisis 2007-2010. The findings suggest that even though both the US and the European indices dropped by up to 35% during the "Black days", the US indices recovered faster than the European indices. The stock market crash during March 2020 is shown to be of similar size to the crash during the Global Financial Crisis, but with larger single-day drops, showing that it has been more concentrated in time. In terms of sector performance, quite similar to the US stock market, Technology, Healthcare and Utilities have been recovering the fastest, while Oil & Gas, Travel & Leisure and Banks have been suffering the most. Comparing the sector performance across different sizes of companies, surprisingly, small and mid-sized Basic Resource and Food & Beverage companies have outperformed larger companies, suggesting that large companies in those sectors might be undervalued.