Risk Synchronization in International Stock Markets

Abstract

We explore international risk synchronization in global stock markets over the last two decades. To this end, we construct global indices of risk synchronization based on individual estimations of market risk and their aggregation via spatial correlations. We then use these indices to analyze the effects of several financial crises on market risk synchronization. Our results reveal different risk-profile dynamics for mature and emerging markets. Contrary to general reports, we also find that not all financial crises induce a higher level of synchronization among markets, at least in relative terms. Indeed, some crises had the opposite effect, that is, a decoupling of market risk.

Key Words:

• Risk propagation
• synchronization
• stock market crises
• international markets
• spatial correlation

Jel Classification:

• C43
• E44
• G15
• F36

Notes

1 Other studies that have used spatial-statistical methods in addressing contagion and interdependence among markets include, for the European case, Novo (2003), Fernández-Avilés et al. (2012) and Keiler and Eder (2013), who estimate spatial autoregressive (SAR) models.

2 t has been dropped to simplify notation.

Additional information

Funding

This work was supported by the Spanish Ministry of Economy, Industry and Competitiveness under grants ECO2015-66314-R and ECO2016-76203-C2-2-P.