We study financial market contagion by applying the volatility index and the correlation between global markets.
The first discovery is that it is difficult for any foreign economic crisis to spread to the US equity market. US market may be slightly affected and drops 1%-5%. However, when this event happens, it is usually a good buyback opportunity.
Another discovery is that when there is an economic crisis in the US, the fear must spread to all global markets. In US financial crises, it often said, “all correlations go to 1.” Francois Longin and Bruno Solnik (2001) used “extreme value theory” to derive the distribution of extreme correlation between US, European, and Asian stock markets. They found that the S&P 500 seemed to lead the other two markets in terms of extreme positive or negative returns. Therefore, investing in other equity markets during the US financial crisis doesn’t reduce losses.
Data:
1997 Asian financial crisis
1998 Russian financial crisis
1999 Argentina economic crisis
2000 US Tech Bubble
2008 US financial crisis
2009 Spanish financial crisis
2010 European debt crisis
2010 Greece crisis
2011 Japanese earthquake
2014 Russian crisis
2015 Chinese market crisis
2018 Turkish crisis
2019 Argentina crisis
Many people believe in the reason why the market value of all share listed in NYSE fell by 30% is that there was an economic bubble and the stock market is irrational. However, is that the truth? We are going to show you three different approaches to the 1929 market crash. Remember that correlation is not causation. These are just references. Approaches: 1. There was no economic bubble before the 1929 market crash. Irving Fisher, a famous US economist said: “prices of stocks are low.” Fisher based his projection on strong earnings reports, fewer industrial disputes, and evidence of high investment in R&D and other intangible capital. 2. There was insider trading. In the months prior to the stock market crash of 1929, the price of a seat on the NYSE was abnormally low. Rising stock prices and volume should have driven up seat prices during the boom of 1929; instead, there were negative cumulative abnormal returns to seats of approximately 20% in the months before the market crash. A...
Comments
Post a Comment