What explains comovement in stock market returns during the 2007–2008 crisis?

Abstract

ABSTRACTThis paper examines the determinants of comovement in stock market returns during the 2007–2008 crisis. Given that the United States (US) was the crisis epicenter, we analyse the factors driving the comovement between US stock market returns and stock market returns in 83 countries. The analysis distinguishes between the period before and after the collapse of Lehman Brothers. The findings indicate that comovement was driven largely by financial linkages. There is also evidence of ‘demonstration effects’ in the first stage of the crisis, as countries with vulnerable banking and corporate sectors exhibited higher comovement with the US market. Finally, despite a collapse in trade across countries, trade did not seem to play a role in explaining comovement in stock market returns. Copyright © 2011 John Wiley & Sons, Ltd.