Stock Market Interdependence and Structural Break and Shifts in Relationship Due to Financial Crisis – A Survey of Theoretical Studies, Empirical Results, and Methodologies Applied in the Previous Studies

During any unique crisis, panic sell-off leads to a massive stock market crash that may continue for more than a day, termed as mainshock. The effect of a mainshock in the form of aftershocks can be felt throughout the recovery phase of stock price. As the market remains in stress during recovery, any small perturbation leads to a relatively smaller aftershock. The duration of the recovery phase has been estimated using structural break analysis. We have carried out statistical analyses of 1987 stock market crash, 2008 financial crisis and 2020 COVID-19 pandemic considering the actual crash times of the mainshock and aftershocks. Earlier, such analyses were done considering absolute one-day return, which cannot capture a crash properly. The results show that the mainshock and aftershock in the stock market follow the Gutenberg–Richter (GR) power law. Further, we obtained higher [Formula: see text] value for the COVID-19 crash compared to the financial-crisis-2008 from the GR law. This implies that the recovery of stock price during COVID-19 may be faster than the financial-crisis-2008. The result is consistent with the present recovery of the market from the COVID-19 pandemic. The analysis shows that the high-magnitude aftershocks are rare, and low-magnitude aftershocks are frequent during the recovery phase. The analysis also shows that the inter-occurrence times of the aftershocks follow the generalized Pareto distribution, i.e. [Formula: see text], where [Formula: see text] and [Formula: see text] are constants and [Formula: see text] is the inter-occurrence time. This analysis may help investors to restructure their portfolio during a market crash.

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International diversification during financial crises

Managerial Finance ◽

10.1108/mf-11-2017-0477 ◽

2018 ◽

Vol 44 (12) ◽

pp. 1434-1445

Author(s):

Chu-Sheng Tai

Keyword(s):

Financial Crisis ◽

Stock Market ◽

Financial Markets ◽

Financial Crises ◽

International Diversification ◽

Subprime Crisis ◽

Content Type ◽

Empirical Results ◽

The Impact ◽

Dot Com

Purpose The purpose of this paper is to provide empirical evidence on how 1999–2001 dot-com crisis and 2007–2009 subprime crisis affect the gains from international diversification from the perspective of US investors. Design/methodology/approach A conditional international CAPM with asymmetric multivariate GARCH-M specification is used to estimate international diversification gains. Findings The authors find that over the entire sample period, the average gains from international diversification is statistically significant and about 1.253 percent per year. During the subprime crisis period, the average gains decreases to about 0.567 percent per year, but it increases to 2.829 percent per year during the dot-com crisis. Research limitations/implications These research findings although confirm the conjectures that international financial turmoil tends to increase the co-movements among global financial markets, are in contrast to the conjectures that international diversification does not work during the financial crisis as evidence from the dot-com crisis. Therefore, future research on international diversification should not just focus on the correlation among international financial markets and should adopt a fully parameterized asset pricing model to study this research topic. Practical implications Given the empirical results found in this paper that international diversification gains may be decreasing or increasing during the financial crisis, as long as investors are not able to predict international financial crises, it is the average gains from international diversification over the longer periods that should encourage investors to diversify, regardless of potentially lower benefits over the shorter periods of time. Originality/value The major value of this paper is that although the increase in the conditional correlation during the financial turmoil is consistent with previous studies, the empirical results clearly show that the impact of a financial crisis on the gains from international diversification cannot be solely determined by the correlation between domestic and world stock market returns since the gains also depend on the unsystematic risk from the domestic stock market. Consequently, it is premature for previous studies to conclude that the gain from international diversification is diminishing due to an increasing correlation among international stock markets during the financial crisis.

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Stock Market Interdependence, Contagion, and the U.S. Financial Crisis: The Case of Emerging and Frontier Markets

CFA Digest ◽

10.2469/dig.v42.n2.24 ◽

2012 ◽

Vol 42 (2) ◽

pp. 64-65

Author(s):

Jonathan Wheeler Hubbard

Keyword(s):

Financial Crisis ◽

Stock Market ◽

Market Interdependence ◽

The U.S

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MULTIFRACTALS IN WESTERN MAJOR STOCK MARKETS HISTORICAL VOLATILITIES IN TIMES OF FINANCIAL CRISIS

Fractals ◽

10.1142/s0218348x17500104 ◽

2017 ◽

Vol 25 (01) ◽

pp. 1750010 ◽

Cited By ~ 4

Author(s):

SALIM LAHMIRI

Keyword(s):

Financial Crisis ◽

Stock Market ◽

Financial Markets ◽

Strong Evidence ◽

Hurst Exponent ◽

Market Price ◽

2008 Financial Crisis ◽

Empirical Results ◽

Return Levels ◽

Generalized Hurst Exponent

In this paper, the generalized Hurst exponent is used to investigate multifractal properties of historical volatility (CHV) in stock market price and return series before, during and after 2008 financial crisis. Empirical results from NASDAQ, S&P500, TSE, CAC40, DAX, and FTSE stock market data show that there is strong evidence of multifractal patterns in HV of both price and return series. In addition, financial crisis deeply affected the behavior and degree of multifractality in volatility of Western financial markets at price and return levels.

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