Measuring the drawdown risk and recovery potential of self-regulatory organizations in response to war events
Ghulam Ghouse, M. Ishaq Bhatti, Aribah AslamPurpose
The purpose of this study is to assess the impact of war events on the performance of self-regulatory organizations (SROs), specifically equity markets. Furthermore, it is segregated into classifications: developing, emerging, stand-alone and frontier regions, including America, Europe, Asia, the Middle East, Africa and the Pacific. This study aims to precisely quantify and assess war-induced volatility and drawdown risks across global SROs, with a focus on structural breaks and recovery potential.
Design/methodology/approach
The sample data includes daily SRO returns from 80 countries between January 3, 2022 and December 31, 2024. Various methodologies are used; the Chow test is used to identify structural breaks during the Russia–Ukraine war. The GARCH model estimates the volatility series, and impulse indicator saturation (IIS) is applied to the event-window analysis. Maximum drawdown is widely used as a key measure of downside risk. The Calmar ratio (CR) provides a risk-adjusted performance measure that captures the speed and strength of the SRO’s recovery after major disruptions. The coefficient of variation is used in CRs to ensure robustness.
Findings
The standalone SROs are most affected and face high drawdown risk. The European SROs have been severely shaken by the Ukraine crisis, while Asian SROs have been slightly affected. The developed SROs are less exposed to such shocks and have a chance of a speedy recovery. The emerging and frontier SROs have similar drawdown ratios, but the frontier SROs show lower strength ratios and weak recovery capacity.
Research limitations/implications
This study used data on developing, emerging, stand-alone and frontier SROs, but it could be extended by conducting an analysis across regions.
Practical implications
The paper can be extended to include further SROs in the region over a wide range of data.
Originality/value
This study makes a novel contribution by using the IIS approach, structural break testing, volatility modeling and reaction and recovery estimators to explore war-induced uncertainty in SROs worldwide with greater precision. Unlike previous research, the approach simultaneously identifies unexpected events, volatility due to disruptions and market sensitivity across regions, and classifies SROs. This combined methodology provides a data-driven, comprehensive understanding of how war-induced and geopolitical crises emerge and spread worldwide.