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

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  • Arnaud Mehl

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.

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  • Arnaud Mehl, 2013. "Large global volatility shocks, equity markets and globalisation: 1885-2011," Globalization Institute Working Papers 148, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:148
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    5. Graham, Michael & Peltomäki, Jarkko & Piljak, Vanja, 2016. "Global economic activity as an explicator of emerging market equity returns," Research in International Business and Finance, Elsevier, vol. 36(C), pages 424-435.
    6. 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.

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    Keywords

    Foreign exchange; Financial markets;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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