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Transmission of Volatility between Stock Markets

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  • King, Mervyn A
  • Wadhwani, Sushil

Abstract

This article investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The authors construct a model in which "contagion" between markets occurs as a result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a "mistake" in one market can be transmitted to other markets. The authors offer supporting evidence for contagion effects using two different sources of data. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
  • Handle: RePEc:oup:rfinst:v:3:y:1990:i:1:p:5-33
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    1. Jerry Green, 1977. "The Non-existence of Informational Equilibria," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 451-463.
    2. Bray, Margaret, 1985. "Rational Expectations, Information and Asset Markets: An Introduction," Oxford Economic Papers, Oxford University Press, vol. 37(2), pages 161-195, June.
    3. Sanford J. Grossman, 1981. "An Introduction to the Theory of Rational Expectations Under Asymmetric Information," Review of Economic Studies, Oxford University Press, vol. 48(4), pages 541-559.
    4. Grossman, Sanford, 1978. "Further results on the informational efficiency of competitive stock markets," Journal of Economic Theory, Elsevier, vol. 18(1), pages 81-101, June.
    5. Sanford Grossman, 1978. "Further results on the informational efficiency of competitive stock markets," Special Studies Papers 114, Board of Governors of the Federal Reserve System (U.S.).
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