Hysteresis is a subject of enormous significance in finance that deserves thorough investigation. Hysteresis denotes a long-term effect that has the potential to significantly alter financial markets, public policies, and decision-making procedures. It exemplifies the idea that previous circumstances and events impact present and future results, having a cascading effect that lasts long after the initial trigger has passed away. Hysteresis offers significant insights into understanding the persistence of economic trends, systemic hazards, and the intricate interplay between many financial factors, making it crucial for market players, regulators, and scholars. 

What is hysteresis? 

Hysteresis is the term used to describe a phenomenon where the repercussions of a past event or circumstance continue and have a long-lasting effect on the current and future status of an economy, market, or financial system. It implies a delay or lags in the system’s response to changes and that it is only sometimes reversible or quick. Hysteresis may be seen in various financial situations, including the protracted impacts of a recession on employment levels and the long-lasting consequences of market shocks on investor confidence. It emphasises that an economy’s or market’s past impacts its current state and direction. 

Understanding hysteresis 

In economics, hysteresis occurs when a single perturbation alters the economy’s direction. Depending on the incident that precipitated hysteresis, many causes can be identified.  

 Nevertheless, the most frequent explanation for the continued market malaise after the event formally ended is that market participants’ views have changed due to the event.  

 For instance, many investors hesitate to reinvest their funds after a market meltdown because of their recent losses. This hesitation results in a lengthier period of declining stock prices because of investor attitudes rather than market fundamentals. 

Types of hysteresis 

The following are the types of hysteresis in the finance world: 

  • Market hysteresis 

Market hysteresis is when a financial market’s actions are impacted by its historical results or tendencies. In the case of a stock market, for instance, a protracted period of drop may severely affect investor mood even after the market begins to rebound, resulting in a prolonged bearish phase. 

  • Economic hysteresis 

The concept of economic hysteresis states that certain financial circumstances or shocks may have a lasting impact on the economy as a whole. For instance, a severe economic downturn might result in long-term unemployment, decreased investment, and less consumer spending even after the recession has officially ended. 

  • Policy hysteresis 

When the results of certain policy actions or changes last over time, this is known as policy hysteresis. For instance, if a government imposes stringent rules on a certain business, the industry may still need help due to the residual impacts of the prior policies, even after the laws are withdrawn. 

Hysteresis due to technology 

When companies implement automation amid a market slump, unemployment hysteresis can also be seen. When the economy begins to recover, workers lacking the skills to run this equipment or recently installed technologies will find themselves out of a job. These businesses will eventually recruit fewer people than before the crisis and hire tech-savvy personnel. As a result, employees will migrate from cyclical unemployment to the group experiencing structural unemployment due to the loss of job skills. The rate of natural unemployment will climb as structural unemployment does. 

Example of hysteresis 

The stock market is a good example of hysteresis in the financial sector. Let’s consider the stock price of a specific firm has decreased significantly. Concerned investors may start selling their shares, driving the stock price even down. Even when the primary cause of the fall has been eliminated or much remedied, this unfavourable attitude and downward pressure may still exist.  

Hysteresis refers to the phenomena in this situation when the effects of previous events or market mood influence present market behaviour, causing a delay or lag in the recovery of stock prices. Even if the company’s financial performance has recovered or the initial bad news is no longer relevant, the stock may continue to trade at a discount for a considerable time. Investors who can spot cheap companies and capitalise on the delayed market reaction may profit from this lag in stock price recovery caused by hysteresis. 

Frequently Asked Questions

Hysteresis in unemployment refers to the phenomenon wherein earlier times of high unemployment impact the long-term unemployment rate. It happens because prolonged unemployment can result in skill deterioration and a loss of labour market connection, making it more difficult for people to obtain work even when the economy recovers. 

Hysteresis prevention can be difficult, but some steps can be taken to make it easier, such as keeping operating conditions steady and predictable, avoiding abrupt changes in parameters or inputs, putting the right control systems in place, and routinely checking and calibrating equipment to ensure accurate and dependable performance. 

Hysteresis can last for a very long time after the economy has recovered and goes beyond cyclical unemployment. Job training programmes may be useful to overcome hysteresis for long-term difficulties such a shortage of skills resulting from workers being replaced by technology advancements. 

Hysteresis is a term used in finance to describe a phenomenon where a financial variable’s response to shifting market circumstances is delayed or lags due to its current state being impacted by its initial values. Hysteresis clarifies why markets don’t operate at their best, even when attempts are made to renew them. Likewise, recognising hysteresis or its trends might assist in resisting it.  

According to the theory of hysteresis, a system’s current state may be affected for some time after prior incidents or shocks. According to the idea, the system’s reaction is influenced by its history and earlier situations in addition to its present ones. 

The benefits of hysteresis include the possibility for momentum and trend-following tactics to make money since market trends may last for a while. Investors looking to profit from long-term market swings may find this favourable. 

    Read the Latest Market Journal

    Weekly Updates 4/3/24 – 8/3/24

    Published on Mar 4, 2024 17 

    This weekly update is designed to help you stay informed and relate economic and company...

    Weekly Updates 26/2/24 – 1/3/24

    Published on Feb 28, 2024 61 

    This weekly update is designed to help you stay informed and relate economic and company...

    All-in-One Guide to Investing in China via ETFs

    Published on Feb 27, 2024 401 

    Start trading on POEMS! Open a free account here! Why China? In the vast landscape...

    Navigating the Post-Inflation Landscape in 2024: Top 10 US Markets Key Events to Look out for

    Published on Feb 23, 2024 418 

    Start trading on POEMS! Open a free account here! In 2023, the United States experienced...

    From Boom to Bust: Lessons from the Barings Bank Collapse

    Published on Feb 23, 2024 62 

    Barings Bank was one of the oldest merchant banks in England with a long history...

    Decoding FX CFD 2.0

    Published on Feb 20, 2024 70 

    This article is aimed at availing information and knowledge essential to intermediate forex traders. It...

    Weekly Updates 19/2/24 – 23/2/24

    Published on Feb 19, 2024 89 

    This weekly update is designed to help you stay informed and relate economic and company...

    Unlock Prosperity with 5 Sure-Fire Financial Instruments!

    Published on Feb 14, 2024 200 

    In Singapore, the concept of guaranteed returns may evoke the spirit of prosperity, reminiscent perhaps...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com