Global Crashes Research Articles

Market Integration and Global Crashes

We develop an equilibrium model of real and financial market integration in which real firms and financial investors independently decide on their investment into different locations (countries). We show that, in the presence financial frictions, firms' real investment choices become strategic complements, leading to multiple, self-fulfilling equilibria. This fragility may lead to a global crash in which severe underinvestment into countries with under-developed financial markets spills over to countries connected to them by real investment linkages. We show that such global crashes are particularly severe when frictions are sufficiently symmetric across countries. By contrast, with enough asymmetry, the economy is likely to end up in a local crash equilibrium in which countries with low real investment barriers suffer the most.

The Rise of Global Stock Market Crash Probabilities

This paper examines the effects of increased interdependence between international stock markets on the probability of global crashes. Global crashes are detrimental to investors, because during such crashes diversification opportunities evaporate. We use three different copulas with different dependence characteristics to allow for possibly nonlinear features in the dependence between stock markets. Irrespective of which copula is used, we find that the probability of observing a global crash in a given week has increased fifteen times. This significantly and dramatically increased global crash probability shows the decrease in diversification opportunities in global stock markets. The Asian crisis and particularly the credit crisis contributed to substantially higher global crash probabilities.

Contagion as a domino effect in global stock markets

This paper shows that stock market contagion occurs as a domino effect, where confined local crashes evolve into more widespread crashes. Using a novel framework based on ordered logit regressions we model the occurrence of local, regional and global crashes as a function of their past occurrences and financial variables. We find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Besides this form of contagion, interdependence shows up by the effect of interest rates, bond returns and stock market volatility on crash probabilities. When it comes to forecasting global crashes, our model outperforms a binomial model for global crashes only.