The realignment of international stock markets after the 1987 crash, with special reference to the Johannesburg Stock Exchange

Abstract

This paper investigates stock price associations between the world’s sixteen largest international markets in the period immediately before and after the 1987 market crash, as well as in a more recent post-crash period. The analysis suggests that the crash had the following effects on stock market interrelationships. Firstly, we find that international markets developed distinctly stronger links with one another following the crash and most particularly with the New York Stock Exchange (NYSE). Secondly, our analysis suggests that stock market interrelationships may be seen to follow a clear regional configuration, not only during the period around the crash, but also more generally. In particular, our analysis identifies four important regional stock market groups: emerging markets in East Asia-Oceania; established markets in Europe, and in North America; and the relatively independent markets in Tokyo, Brussels and Milan. Stock markets within a particular group exhibit definite common behaviour attributes. This observation suggests that the potential for the international diversification of equity portfolios has a distinct regional profile, corresponding closely with a small number of geographical areas. Thirdly, the Johannesburg Stock Exchange (JSE) followed emerging market behaviour very closely during the October 1987 crash, although more generally, the JSE’s behaviour appears to be dominated by the influence of the NYSE. Finally, we investigate the immediate vicinity of the 198? crash, and examine the role of the gold price as a mechanism which insulates the JSE from international financial disturbances.