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Large global volatility shocks, equity markets and globalisation: 1885-2011

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  • Mehl, Arnaud
Abstract
I estimate the transmission of large global volatility shocks in international equity markets from the earlier (pre-1914) to the modern era of globalisation. To that end, I identify 43 such shocks over the period 1885-2011, defined as significant increases in unanticipated volatility in US equity markets, which I relate to well-known historical events. My estimates suggest that the response of global equity markets to these shocks in a panel of 16 countries is both statistically significant and large economically. On average, global equity market valuations correct by about 20% in the month when a shock occurs. There is substantial heterogeneity in responses both across countries and time, however, which can be partly explained by differences in global trade integration. I find no evidence that other potential theoretical determinants, such as output composition, country fundamentals or global policy responses matter, by contrast. These results shed light on a neglected aspect of globalisation, which creates opportunities but also heightens the exposure of economies to acute surges in global uncertainty and risk aversion. JEL Classification: F30, F31, N20

Suggested Citation

  • Mehl, Arnaud, 2013. "Large global volatility shocks, equity markets and globalisation: 1885-2011," Working Paper Series 1548, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20131548
    Note: 501438
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    More about this item

    Keywords

    equity markets; globalisation; international linkages; large global volatility shocks;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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