International Evidence on Market Linkages After the 2008 Stock Market Crash

Gulser Meric, Christine Lentz, Wayne Smeltz and Ilhan Meric

The International Journal of Business and Finance Research, 2012, vol. 6, issue 4, 45-57

Abstract: The 2008 crash was the most important global stock market crash in history since the Great Depression. In this paper, we study the contemporaneous co-movements of and the time-series lead/lag linkages between global stock markets after the 2008 stock market crash by using the time-varying correlation analysis, principal components analysis (PCA), and Granger-causality (G-C) statistical techniques. We find that correlation between global stock markets has increased and the benefit of global portfolio diversification has decreased since the 2008 stock market crash. The PCA technique can group global stock markets in terms of the similarities in their contemporaneous movements. Global investors can maximize the portfolio diversification benefit by investing in stock markets with high factor loadings in different principal components. Our PCA results indicate that all Asian stock markets, except the Japanese stock market, are lumped together in one principal component and the stock markets in the rest of the world are lumped together in another principal component. Our G-C test results show that the U.S. stock market has substantial influence on the European and Australasian stock markets. U.S. stock returns lead the European and Australasian stock returns (i.e., the past returns of the U.S. stock market can predict the future returns of the European and Australasian stock markets).

Keywords: 2008 Stock Market Crash; Global Stock Market Linkages; Global Portfolio Diversification; Time-Varying Correlation; Principal Components Analysis; Granger Causality (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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