How to respond to coronavirus headlines?
A major challenge facing investors in responding to coronavirus news flow is a lack of systematic research to guide decision making after surprise geopolitical events, such as epidemics.
Do markets generally underreact, suggesting that investors should quickly exit exposed positions? Or does panic tend to cause overreaction, suggesting that investors should double down?
A unique study: the market’s reaction to shocks
To provide systematic perspective on circumstances where discussion has generally been driven by anecdote, Acadian conducted a novel study regarding how the market has reacted to a broad sample of geopolitical shocks.
We found no evidence that diversified investors should reduce or liquidate their position in a market following a shock, absent an informed view on the specific circumstances. (See chart below.)
The results suggest that for a diversified investor without an informational edge regarding a particular situation, the best course of action is to stay the course.
Please find the original research, Geopolitical Shocks: What to Expect from the Unexpected.
Returns from a case study of selected geopolitical events (1926-2015)
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