Large global volatility shocks, equity markets and globalisation: 1885-2011

Arnaud Mehl

No 148, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: I estimate the transmission of large global volatility shocks in international equity markets from the earlier (pre-1914) to the modern era of globalisation. To that end, I identify 43 such shocks over the period 1885-2011, defined as significant increases in unanticipated volatility in US equity markets, which I relate to well-known historical events. My estimates suggest that the response of global equity markets to these shocks in a panel of 16 countries is both statistically significant and large economically. On average, global equity market valuations correct by about 20% in the month when a shock occurs. There is substantial heterogeneity in responses both across countries and time, however, which can be partly explained by differences in global trade integration. I find no evidence that other potential theoretical determinants, such as output composition, country fundamentals or global policy responses matter, by contrast. These results shed light on a neglected aspect of globalisation, which creates opportunities but also heightens the exposure of economies to acute surges in global uncertainty and risk aversion.

Keywords: Foreign exchange; Financial markets (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-fmk, nep-his, nep-ifn and nep-opm
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Citations: View citations in EconPapers (2)

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Working Paper: Large global volatility shocks, equity markets and globalisation: 1885-2011 (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:148

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