Oil, Ukraine, Greece, China and Volkswagen. Measuring the Reaction of Global Finance.

Over the past twelve months we’ve had the Ruble crisis, the plummeting oil prices, the Ukraine crisis, the Greek referendum and elections, the Chinese markets plunge and, recently, the Volkswagen scandal. Which hit the hardest? How do you measure the intensity of a crisis? How do you measure the response of the economy in such circumstances? Clearly, a crisis is a debilitating event. Otherwise, it wouldn’t be a crisis. After a crisis a system recovers. If it doesn’t it wasn’t a crisis, it was a catastrophic collapse. So, how intense was each of these events in terms of impact on global finance and how did global finance react?

The magnitude of a crisis may be quantified in terms of how much fragility it induces in a given system. This may be measured easily a loss of resilience (the opposite to fragility). Resilience measure the capacity of a system to absorb shocks, a most convenient property nowadays. The plot below illustrates the evolution of the resilience of the global financial system based on all of the World’s stock markets and their interactions.

The plot shows clearly how, in each case, resilience fell by up to 15%. After the ruble crisis and plunge of oil prices the system recovered its resilience in a matter of 3 months. Then came the Ukraine crisis, with another drop of 15%. again, recovery of resilience was quite steady. Then Greece came back on the radar, causing a slow and progressive increase in fragility, to fall suddenly when the bailout referendum was announced. In June the system had an alarmingly low value of resilience – 46%. A jumpy recovery followed once more until the Chinese markets fell. However, in this case there was little damage done. A certainly more intense reaction came after the Volkswagen fraud has been discovered, a nearly 10% drop in resilience. As the VW crisis unfolds it will be interesting to observe how far the reaction will extend.