Aurora Borealis
1 January 2017 CFA Institute Journal Review

Worrying about the Stock Market: Evidence from Hospital Admissions (Digest Summary)

  1. Derek W. Johnson, CFA

In this study, the authors find a significant correlation between stock market corrections and an increase in hospital emergency room admissions, especially for admissions because of such mental emergencies as panic disorder, anxiety, and major depression. They show that these admissions happen on both the day of and the day after stock market corrections, leading to the theory that the mental stress is related to fears about future consumption.

What’s Inside?

The authors find a significant correlation between stock market corrections and an increase in hospital admissions, especially for admissions because of such mental emergencies as panic disorder, anxiety, and major depression. They build on current behavioral asset-pricing research but use a unique approach. Rather than using surveys and questionnaires to measure how people feel about stock market movements, the authors look at hard data on hospital admissions. They find an almost instantaneous response to market selloffs, with hospital admissions going up the day of and the day following the correction and dropping off thereafter—thus measuring both how much the stock market fluctuates and how quickly the fluctuations affect investor psychology.

According to the authors, there are three important reasons for this research. First, to the extent that behavioral influences are important determinants of prices, anything that induces large changes resides in the domain of economics. Second, market movements may contribute to investor sentiment, resulting in a feedback mechanism. Third, the extent to which market changes instantaneously affect well-being is probably the result of expectations about future consumption. If investors are worried about future consumption, they may have stress-induced medical emergencies because of larger economic concerns.

The authors test for this possibility by reading headlines around the large market selloffs to help understand whether a particular news event is causing the selloff. They find that a little more than half the time (56%), no news event is provided. The authors also find that the correlations between emergency room admissions and stock market corrections are larger when the corrections occur in a low-volatility environment.

How Is This Research Useful to Practitioners?

Behavioral research has become an important component of the practitioner’s toolkit in terms of understanding the pricing and movements of markets. Stepping outside the usual aspects of theory, the authors look at the incidence of hospital admissions associated with large downward corrections in the market. Assuming that only a minority of investors actually seek medical help for short-term distress during selloffs, this research has much larger ramifications when viewed from a broader perspective. The authors cite previous academic work showing a price feedback mechanism. If extreme market movements cause physical distress, it is safe to assume that they can also affect current pricing and future price movements. The authors have opened the door to further research in this area of behavioral finance.

How Did the Authors Conduct This Research?

The authors obtain admission records for every California hospital for each day over 1983–2011 and form portfolios of stock returns from an index of local, publicly traded companies that they consider relevant to California residents. They perform a regression analysis to determine whether, and how quickly, the stock market affects investors’ psychological well-being, restricting their sample to include only health conditions related to such psychological problems as anxiety, panic attacks, depression, and so on. The authors also identify the 1,463 days that have, in aggregate, the lowest 20% of returns in their sample to see whether there is any correlation between the market correction and bad news, such as economic weakness, foreign conflicts, terrorist attacks, company announcements, or other events. They find that many extreme market movements are unaccompanied by news events.

Abstractor’s Viewpoint

The idea of stock market corrections playing such a dramatic role in investor psychology as to cause a spike in hospital admissions is novel. The authors point out that hospital admissions are an extreme and small component of what could be a much larger psychological stress experienced by many investors. This stress could play a very important role in asset pricing. This paper is a strong addition to the research in behavioral finance.

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