In his regular New York Times column, Mark Hulbert looks at the stock market’s behavior since the credit crisis began and references a 2001 academic study to glean some insight as to what we can learn from these types of periods. He writes, “you can view the markets’ behavior since mid-2007 as a textbook illustration of a statistical pattern uncovered years ago by two finance professors, Lubos Pastor of the University of Chicago and Robert F. Stambaugh of the Wharton School of the University of Pennsylvania. They found that the financial markets are always vulnerable to what they called a liquidity shock — a sudden tightening of credit.”

According to Lasse Pedersen, a finance professor at New York University, this research can help us understand what has happened in the last 18 months. It also provides some clues for what could happen in the future. For example, Hulbert writes that “the research has found that when liquidity shocks occur, they are so intense that the securities most vulnerable to them predictably provide higher longer-term returns. This happens, Professor Pastor said in an interview, because these securities must compensate investors for the risk of big losses during those shocks.”

“According to the research,” Hulbert adds, “once a liquidity crisis passes, other factors come to the fore, and securities that have risen in price, like Treasury bonds, are then likely to perform poorly. By contrast, the best performers will be those securities that have lost the most during past credit crises — not just during the current one. Convertible bonds and junk bonds are two obvious categories that should do particularly well, but others, including stocks, should also benefit.”