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Market fragility and international market crashes

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  • Berger, Dave
  • Pukthuanthong, Kuntara
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    Abstract

    We extend the Pukthuanthong and Roll (2009) measure of integration to provide an estimate of systemic risk within international equity markets. Our measure indicates an increasing likelihood of market crashes. The conditional probability of market crashes increases substantially following increases of our risk measure. High levels of our risk measure indicate the probability of a global crash is greater than the probability of a local crash. That is, conditional on high levels of systemic risk, the probability of a severe crash across multiple markets is larger than the probability of a crash within a smaller number of markets.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 105 (2012)
    Issue (Month): 3 ()
    Pages: 565-580

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    Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:565-580

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Financial crises; Systemic risk; Crash; Fragility;

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    References

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    1. Geert Bekaert & Campbell R. Harvey, 2003. "Market Integration and Contagion," NBER Working Papers 9510, National Bureau of Economic Research, Inc.
    2. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    3. Bartram, Söhnke M. & Brown, Gregory W. & Hund, John E., 2005. "Estimating Systemic Risk in the International Financial System," MPRA Paper 6658, University Library of Munich, Germany.
    4. Roberto Rigobón & Kristin Forbes, 2001. "Contagion in Latin America: Definitions, Measurement, and Policy Implications," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
    5. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
    6. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Labys, Paul, 2002. "Modeling and Forecasting Realized Volatility," Working Papers 02-12, Duke University, Department of Economics.
    7. Berger, Dave & Pukthuanthong, Kuntara & Jimmy Yang, J., 2011. "International diversification with frontier markets," Journal of Financial Economics, Elsevier, vol. 101(1), pages 227-242, July.
    8. Greenwood, Robin & Thesmar, David, 2011. "Stock price fragility," Journal of Financial Economics, Elsevier, vol. 102(3), pages 471-490.
    9. Markwat, Thijs & Kole, Erik & van Dijk, Dick, 2009. "Contagion as a domino effect in global stock markets," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1996-2012, November.
    10. W. R. M. Perraudin & Manmohan S. Kumar & Uma Moorthy, 2002. "Predicting Emerging Market Currency Crashes," IMF Working Papers 02/7, International Monetary Fund.
    11. Christiansen, Charlotte & Ranaldo, Angelo, 2009. "Extreme coexceedances in new EU member states' stock markets," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1048-1057, June.
    12. Asgharian, Hossein & Nossman, Marcus, 2011. "Risk contagion among international stock markets," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 22-38, February.
    13. Dave Berger & H. J. Turtle, 2009. "Time Variability In Market Risk Aversion," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 32(3), pages 285-307.
    14. Longstaff, Francis A., 2010. "The subprime credit crisis and contagion in financial markets," Journal of Financial Economics, Elsevier, vol. 97(3), pages 436-450, September.
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    Cited by:
    1. Charlotte Christiansen, 2012. "Integration of European Bond Markets," CREATES Research Papers 2012-33, School of Economics and Management, University of Aarhus.

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