TY - JOUR T1 - Are Extreme Negative Return Events Independent of the Market? JF - The Journal of Wealth Management SP - 60 LP - 73 DO - 10.3905/jwm.2020.1.099 VL - 23 IS - 1 AU - Huijian Dong AU - Xiaomin Guo AU - Han Reichgelt Y1 - 2020/04/30 UR - https://pm-research.com/content/23/1/60.abstract N2 - This study defines an extreme daily loss event as a daily return lower than 97.5% of their historical daily returns. We also define an extreme loss of an asset as forgivable if it happens during an extreme down market and as unforgivable if the concurrent market performance is normal. We find that half of extreme losses generated by the Russell 3000 components are forgivable, and the average forgivable loss is similar to the average unforgivable loss. After the S&P 500 Index experiences an extreme loss event, the 1-day and 5-day returns of assets that also undergo extreme losses concurrently are 0.9768% and 1.9495%, respectively. Without an overall market index extreme loss, the postextreme-loss recoveries of individual assets are 0.7171% and 1.6724%. Our results suggest that the high degree of equity market spectrum dispersion leads to independent individual asset price trajectories. We find that the counts of extreme loss events do not decrease linearly as the equity market performance escalates to higher percentile categories.TOPICS: Wealth management, performance measurementKey Findings• If an equity asset experiences extreme loss on a day when the equity market does not experience extreme loss, the average loss of the asset is −8.6344%, and the 1-day and the 5-day recovery returns are 0.7171% and 1.6724%, respectively.• If an equity asset experiences extreme loss on a day when the equity market experiences extreme loss concurrently, the average loss of the asset is −7.7803%, and the 1-day and the 5-day recovery returns are 0.9768% and 1.9495%, respectively. • Extreme loss events are relatively independent from the equity market performance, and better market returns do not reduce the occurrence of extreme loss events. ER -