Why an airplane crash is not like a stock market crash?

The recent Indian stock market crash was caused by a payment default of a major infrastructure financing company on its commercial paper obligations hijacking liquidity networks for non banking financial companies. This caused the stock prices of these companies to crash in a downward spiral raising concerns that there could even be a technical default to bondholders.

These companies are an important part of the credit economy. Their stocks also exhibit very high volatility such that their reaction to monetary policy is exaggerated and their down slide spells trouble for the financial sector as a whole. The benchmark index underwent a sharp correction as a result and has struggled to show the same performance it showed in 2018 since then.

But this could be categorized as a 3 sigma event impacting market and liquidity risks for the broader set of companies.

On the other hand, an airplane crash has the potential to be a six sigma event if it hits the nerve center of international trade causing irreparable damage to investor confidence and stalling trade.

Also the airplane crash can cause firms to switch to their disaster recovery systems thereby moving to the last strains of their resilience infrastructure. This starts another massive exercise to manage crises and redevelop confidence as a strong organization for the longer term which can take years to build.

But would you factor the airplane crash into your stress scenario? Probably not. It’s just a matter of misfortune.