Financial Crisis,Market Contagion &Research On Co-movement Among Stock Markets In Four European And American Countries

Globalization has become the most popular world economic trend in 21 st century.There has never been more frequent movement of commodities and capital between nations and never have their economic activities become more interlinked with each other.Due to their similar economic system s,economies in developed countries from North America and Europe tend to be more dependent upon each other when compared to developing countries.At the same time the co-movement between stock markets in these countries is closer in the global market.Recently ther e were two financial crises——the sub-prime debt crisis and European debt crisis originat ing from the US and Europe which had a huge impact on the economies respectively.In fact,these countries' stock markets tend to go up and down simultaneously and the co-movement between these stock markets has been increased during the two financial crises.The research on co-movement between developed countries,particularly on their fluctuation and contagion channels during financial crises,have great significance on diversification of risk for international investors and risk management for emerging market.This dissertation has a detailed literature review about stock market co-movement and the relationship between co-movement and market contagion during financial crises.Next,financial crisis theory,stock market co-movement theory and market contagion theory have been detailed elaborated.Later,empirical research has been made on four stock market index from US,Britain,Germany and France.The index daily closing price has been collected from 1st January to 31 st December 2011.Multiple quantitative research methodologies have been implemented to analysis the daily logarithm return of the four stock market index.They are the State-Space model,Quantile regression,DCC-GARCH,Copula,FMOLS and ECM model.We intend to deeply analyze the co-movement of these four stock markets from multiple perspectives and the four market contagion channels among these four stock markets in three periods---pre-crisis,Sub-prime crisis and European debt crisis.The empirical research is as follows:Firstly,the sample period is divided into three sub-periods: pre-crisis,sub-prime crisis and European debt crisis.Further research is conducted on the four indexes during each three sub-periods of time by Space-state model and Quantile regression.The results show that the American stock market exerts an enormous influence on the three European stock markets.The coefficient determined by Space-state model fluctuates dramatically during pre-crisis time period and remains stable afterwards.The Quantile regression results show that the American stock market has an impact on the three European markets in a different way.Secondly,further research is conducted to analyze the volatility of daily logarithm return of the four indexes during the same sub-period time by DCC-GARCH model and Copula model.The modeling results show that the volatility co-movement in these four stock market varies along with the time.This volatility co-movement is not only non-linear but also more uncertain during a financial crisis.Thirdly,further research is conducted to analyze how the four market contagion channels,which are international trade spillover effect,financial spillover,industrial structure and pure contagion,influence the co-movement mechanism among the four market.The result reveals that before financial crisis,the four contagion effect has little significant impact on stock markets co-movements.However,during the financial crisis time,the four contagion channels are significantly main reasons for the four stock markets' co-movements.Besides.These four contagions are both the long term and short term Granger cause for the co-movements among the four stock markets.Based on the literature review,the four stock markets characteristics and our empirical results,we can confidently conclude that these four countries stock market has formed a US stock-market centered co-movement equilibrium.During the outbreak of a financial crisis,the four stock markets tend to be driven away from the long term equilibrium.When the financial crisis ends,they return to equilibrium.The co-movement of daily logarithm return of these four stock markets increases during a financial crisis and the volatility co-movement varies much more and is more uncertain during a financial crisis.Last but not the least,th is dissertation identified the reason behind the co-movement from the perspective of four market contagion channels---international trade spillover,financial spillover,industrial structure and pure contagion.These four channels have also been tested to be the long term and short term Granger cause for the four stock market co-movements.Hopefully my research is suggestive to international dive rsification and risk management.