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

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  • Mehl, Arnaud

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. JEL Classification: F30, F31, N20

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Paper provided by European Central Bank in its series Working Paper Series with number 1548.

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Date of creation: May 2013
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Handle: RePEc:ecb:ecbwps:20131548

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Keywords: equity markets; Globalisation; international linkages; large global volatility shocks;

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Cited by:
  1. Georgescu, George, 2013. "Echilibrul financiar global şi riscul suveran în perioada post-criză
    [The Global Financial Balance and Post-Crisis Sovereign Risk]
    ," MPRA Paper 50772, University Library of Munich, Germany.
  2. George GEORGESCU, 2013. "Volatility Of International Financial Markets And Public Debt Sustainability," Romanian Journal of Economics, Institute of National Economy, vol. 37(2(46)), pages 135-152, December.
  3. Georgescu, Marius, 2013. "Despre tensiunea local – global în economia mondială contemporană
    [About the local-global tension in the contemporary world economy]
    ," MPRA Paper 49799, University Library of Munich, Germany.

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