About
A global market crash is a dramatic decline in stock prices that results in the loss of substantial paper wealth for investors. Crashes are often a result of panic selling and underlying economic factors like bubbles. They can also be triggered by government and central bank interventions like changing interest rates or fiscal aid packages.
In this study, we use data from the HRS to examine the effect of the 2008 stock market crash on respondents’ financial wealth and psychological well-being. Our dependent variable DWi is the change in respondents’ total non-housing wealth (stock and mutual fund investments, IRAs, etc.) between the 2006 and 2008 surveys. The key explanatory variable is POST, which is a dummy variable that equals 1 if the survey interview took place after October of 2008 and 0 otherwise. This allows us to identify the effects of the stock market crash alone, controlling for observable traits and other variables that may have affected respondents’ wealth.
We find that the stock market crash had a significant negative effect on respondents’ financial wealth, with those in the top-half of the distribution losing more than half of their financial wealth. Moreover, subjective measures of mental health worsened among respondents interviewed post-crash, especially those who lost more wealth. In addition, the proportion of respondents taking antidepressants rose significantly. These changes are consistent with previous work suggesting that a sudden drop in stock prices can lead to financial anxiety and depressed mood.