In a situation where the amplitude of short-term strong changes in valuations of securities, including shares and bonds on securities markets, is increasing, the situation of extreme reappraisal of these valuations is more frequent and the risk of a spectacular, sharp discount, bear market and stock market crash increases. And such violent stock market crashes began with major financial and economic crises.
The largest economic crises lasting a few years were the source of many negative macroeconomic processes, decline in host growth, consumption, investment, and an increase in unemployment. There were large social costs, productivity dropped, tax revenues to the state budget, the state of public finances deteriorated.
Paradoxically, in the situation of increased financing needs for new development projects, which should restore optimal economic growth, in the situation of an economic crisis, the possibilities of financing new investment projects based on public funds were decreasing. The source of this type of economic crises is the lack of a full correlation between the valuation of assets on stock exchanges and the processes of productivity and consumer demand for manufactured economic goods.
In addition, after analyzing the sources of the global financial crisis of 2008, the erroneously pursued monetary policy by the largest central banks, including in particular the Federal Reserve Bank, is added to the sources of this largest financial crisis in the history; moral gaming practiced by investment banking trading in securities used to finance mortgage loans for borrowers without creditworthiness; imperfect credit risk management systems for derivatives or unreliable practices, non-compliance with security procedures for credit risk analysis and control, and many other factors in investment banking.
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I do not think the Stock Indices on their own are a good enough indicator.
Check out what caused the collapse of Enron as a classic case study. That disrupted the entire U.S financial market in 2001 from Enron's bankruptcy and fraudulent financial reporting position. There are many other listed firms in similar financial condition in today's world with similar implications on their respective stock markets.
In the last crisis the issues were in the reverse order, a fianncial crisis via accelreator effects caused an economics crisis (both of which altered the systemic risk) which caused poor stock market performace. In pricnciple mass devaluation can distress firms and alter bank risk tolerance, this would affect the real economy via accelerator effects. My the nature of macroecnomic policy no responce to a recession will ever be perfect as it is mnot possible to control inflation, growth and exchange rate value at the same time.
Well, according to classics with E. Fama - simply impossible cause we do not khow if the trend bubblish is or it's fundamental, before it explodes)))
According to Keynesians and Co. - yes, e.g. deviations from the long-term trend (R. Shiller with mortgage case comes to mind). I doubt that particularly "systemic" risk may be captured with the stock market indices. It depends on the market origin of the bublle, like Michael Harrison has mentioned (I prefer money aggregates, lending scale, risk premia and so on for banks-oriented financial markets).
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