Taiwan Stock Market Crash

Continuing the theme of anomalies, we have a very good example. Last Wednesday, the Taiwanese stock market opened as usual, but before the morning was over, it dropped almost 9% ( Figure 1)! A drop of this size is unprecedented in the history of the Taiwanese stock market since its inception 54 years ago. What happened?

 

Figure 1. The drop of May 12. Source: yahoo finance

Market analysts suggest several reasons for this event. But to better understand what happened, we must start with the reasons for the success of the Taiwanese index. Taiwan, an important exporter of electronic chips, has benefited more than others from the trade war between the United States and China: the Taiwanese index (the Taiex) has had the strongest growth among all the world's stock market indexes for the last 4 years according to Bloomberg. Moreover, due to the shortage of chips in the world for the last seven months, the Taiwanese index was constantly rising. 

Because of this great performance, many stock market participants borrowed money to buy stocks. 

But then things changed. For the past 2 weeks, the pandemic has also affected Taiwan. The fear of the pandemic is surely a cause of anxiety for investors. But there is another reason. Stock market enthusiasts know very well that technology stocks have fallen into disgrace during the last few weeks. And for margin traders, that means a margin call. To meet this call, many investors had to liquidate their positions, which caused a sharp drop in the index price. 

There is a risk that the same thing can happen in other countries. So we can learn from the mistakes of these traders and be more careful during a turbulent period.