The effect of interconnectivity on stock returns during the Global Financial Crisis

Thiago Silva (), Paulo Victor Berri Wilhelm and Benjamin Tabak

The North American Journal of Economics and Finance, 2023, vol. 67, issue C

Abstract: This paper examines the role of interconnectivity in global stock markets during the Global Financial Crisis (GFC) using a comprehensive dataset of 8,827 firms traded in developed and emerging markets. Our contribution includes two key findings. We first use a difference-in-differences approach to show that stocks in countries with higher trade openness ex-ante to the GFC experienced lower average and annual cumulative returns of 9.08 p.p. and 36.32 p.p., respectively, compared to stocks traded in less exposed countries, one year after the crisis outbreak. Second, we employ complex network theory to analyze the role of network interconnectedness in our baseline results. To construct the network of interdependence between stock returns, we utilize a regularized Vector Autoregression Model, which enables us to overcome the limitations of commonly used correlation networks. Our findings suggest that while a firm’s high connectivity before the crisis can alleviate adverse shock effects resulting from export dependence, this effect may be weakened if the firm’s performance is closely linked to central firms.

Keywords: Global Financial Crisis; Stock returns; Difference-in-differences; Complex networks (search for similar items in EconPapers)
JEL-codes: C23 D85 G10 G14 G15 L14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:67:y:2023:i:c:s1062940823000633

DOI: 10.1016/j.najef.2023.101940

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