Co-movements of global stock markets before and after the 2008 stock market crash

Ilhan Meric, Larry M. Prober, Linguo Gong, Gulser Meric

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Empirical studies show that global stock market crashes tend to have a significant effect on the co-movement patterns of national stock markets. In this paper, we study the impact of the 2008 stock market crash on the co-movements of national stock markets and global portfolio diversification benefits. The data for the study are drawn from the Yahoo/Finance database and the study covers all the global stock markets included in the database. We compute rolling correlation coefficients to study time-varying correlation between the U.S. stock market and the world's other stock markets during the May 15, 2006-July 31, 2010 period. The findings indicate considerable volatility in the U.S. stock market correlation with all the other national stock markets, particularly with the Asian stock markets, during this period. U.S. correlation with all countries was very high during the October 10, 2007-March 9, 2009 crash period when all stock markets experienced a sharp fall. We use the Principal Components Analysis (PCA) technique to study the changes in the co-movement patterns of the markets. The number of statistically significant principal components is four for the May 15, 2006-October 10, 2007 pre-crash period, three for the October 10, 2007-March 9, 2009 crash period, and two for the March 9, 2009-July 31, 2010 post-crash period. These results imply that correlation between the world's stock markets has been increasing and global portfolio diversification benefits have been decreasing during the May 15, 2006-July 31, 2010 period. Our findings indicate that U.S., European, and Latin American investors would obtain the most portfolio diversification benefit by investing in Asian stock markets, and vice versa, in the post-crash period.

Original languageEnglish (US)
Pages (from-to)67-83
Number of pages17
JournalInternational Research Journal of Finance and Economics
Volume74
StatePublished - Aug 1 2011

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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