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Stock market crises in developed and emerging markets

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  • Sandeep Patel
  • Asani Sarkar

Abstract

We empirically examine stock price index data for eight developed and ten emerging markets from 1970 to 1997. There were nine stock market crises over our sample period, three each in the developed stock markets, the Asian stock markets and the Latin American stock markets. We find important differences in the characteristics of stock market crises between the developed and emerging stock markets. While each developed market crisis has been less severe than the previous one, both in terms of the extent of price decline and the duration of the crises, this is not so for the emerging stock markets. For emerging markets stock crises, prices tend to fall rapidly and steeply, but take longer to recover, in about three years on average. For both developed and emerging markets, prices fall for at least three years subsequent to recovery from a crisis. All the crises we study are associated with contagion---i.e., most individual markets in a region are in crisis when the regional market is also in crisis. Finally, for U.S. investors with long investment horizons (six months or more), international stocks continue to provide diversification benefits even during times of market crises.

Suggested Citation

  • Sandeep Patel & Asani Sarkar, 1998. "Stock market crises in developed and emerging markets," Research Paper 9809, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9809
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    3. Wen-Ling Lin & Takatoshi Ito, 1994. "Price Volatility and Volume Spillovers between the Tokyo and New York Stock Markets," NBER Chapters,in: The Internationalization of Equity Markets, pages 309-343 National Bureau of Economic Research, Inc.
    4. Neumark, David & Tinsley, P A & Tosini, Suzanne, 1991. " After-Hours Stock Prices and Post-Crash Hangovers," Journal of Finance, American Finance Association, vol. 46(1), pages 159-178, March.
    5. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    6. Simon van Norden & Huntley Schaller & ), 1995. "Speculative Behaviour, Regime-Switching, and Stock Market Crashes," Econometrics 9502003, University Library of Munich, Germany.
    7. Gikas A. Hardouvelis, 1988. "Evidence on stock market speculative bubbles: Japan, the United States, and Great Britain," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 4-16.
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    Cited by:

    1. Anne-Laure Delatte & Julien Fouquau & Richard Portes, 2014. "Nonlinearities in sovereign risk pricing the role of cds index contracts," Sciences Po publications 2014-08, Sciences Po.
    2. Sharkasi, Adel & Crane, Martin & Ruskin, Heather J. & Matos, Jose A., 2006. "The reaction of stock markets to crashes and events: A comparison study between emerging and mature markets using wavelet transforms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 368(2), pages 511-521.
    3. Charlie Cai & Robert Faff & David Hillier & Michael McKenzie, 2006. "Modelling return and conditional volatility exposures in global stock markets," Review of Quantitative Finance and Accounting, Springer, vol. 27(2), pages 125-142, September.
    4. Yu-Hau Hu & Shun-Jen Hsueh, 2013. "A Study of yhe Nonlinear Relationships among the U.S. and Asian Stock Markets during Financial Crises," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 134-147, December.
    5. repec:oup:revfin:v:21:y:2017:i:1:p:363-385. is not listed on IDEAS
    6. Anne-Laure Delatte & Julien Fouquau & Richard Portes, 2017. "Regime-Dependent Sovereign Risk Pricing During the Euro Crisis," Review of Finance, European Finance Association, vol. 21(1), pages 363-385.
    7. Nikkinen, Jussi & Omran, Mohammad M. & Sahlstrom, Petri & Aijo, Janne, 2008. "Stock returns and volatility following the September 11 attacks: Evidence from 53 equity markets," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 27-46.
    8. Omay, Tolga, 2010. "A Nonlinear New Approach to Investigating Crisis: A Case from Malaysia," MPRA Paper 20738, University Library of Munich, Germany.
    9. repec:dau:papers:123456789/13143 is not listed on IDEAS

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