The stock market seems to be returning to the old normal of higher levels of volatility. I suggested on Tuesday that former Fed Chairman Alan Greenspan’s comments could have brought back volatility by triggering the Dow Sell-off on Monday, February 5th. As I wrote early in the week, I believe that we should observe some panic manifestation of economic anxiety because of Mr. Greenspan’s comments. In this Blog Post, I will show two Person Correlation tests that may allow inferences as to how investors’ fear has grown since Mr. Alan Greenspan stated that the American Economy has both a Stock Market Bubble and a Bond Market Bubble. The Pearson correlation tests show that the correlation has strengthened during the last seven days (First week of February 2018), suggesting there might be symptoms of Contagious effect.
I correlate two variables taken from two different time frames for the fifty states. First, the natural logs of the search term “Inflation”; and, the natural logs of the search term “VIX” (Volatility Index). Second, I correlate the natural logs of the same searches for both the last seven days period and the previous twelve months period. By looking at the corresponding coefficients, one may infer that the correlation increased its strengthen after Mr. Greenspan Statements -which reflects on the last seven days data. The primary goal of this analysis is to gather enough information so that analysts can conclude whether there is a Contagious Effect that could make things go worst. Understanding the dynamics of economic crisis starts by identifying the triggers of them.
What is Contagious Effect?
I should say that the best way to explain the Contagious Effect is by citing Paul Krugman’s quote of Robert Shiller (see also Narrative Economics), “when stocks crashed in 1987, the economist Robert Shiller carried out a real-time survey of investor motivations; it turned out that the crash was essentially a pure self-fulfilling panic. People weren’t selling because some news item caused them to revise their views about stock values; they sold because they saw that other people were selling”.
Thus, the correlation that would help infer a link between both expectations is inflation and the index of investors’ fear VIX. As I mentioned above, I took data from Google Trends that show interest in both terms and topics. Then I took the logs of the data to normalize all metrics. The Pearson correlation tests show that the correlation has strengthened during the last seven days, suggesting there might be symptoms of Contagious effect. The over the year Person correlation coefficient is approximate to .49, which is indicative of a medium positive correlation. The over the week Person correlation test showed a stronger correlation coefficient of .74 which is indicative of a stronger correlation. Both p-values support evidence to reject the null hypothesis.
The following is the results table:
February 1st – February 8th correlation (50 U.S. States):
February 2017 – February 2017 (50 U.S. States):
It is worth noting the sequence of the events that led to these series of blog posts. On January 31st, 2018 Alan Greenspan told Bloomberg News: “There are two bubbles: We have a stock market bubble, and we have a bond market bubble.” And, on February 5th, 2018, Dow Jones index falls 1,175 points after the trading day on Monday. As of the afternoon of Friday 9th, the Dow still struggle to recover, and it is considered to be in correction territory.