Transmission of Volatility Between Stock Markets
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NBER Working Paper No. 2910
Issued in March 1989
NBER Program(s): ME
This paper investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The idea is that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a "mistake" in one market can be transmitted to other markets. Hourly stock price data from New York, Tokyo and London during an eight month period around the crash offer support for the contagion model. In addition, the magnitude of the contagion coefficients are found to increase with volatility.
Published: Review of Financial Studies, Vol. 3, No. 1, pp. 5-33, 1990.
This paper is available as PDF (325 K) or DjVu (252 K) (Download viewer) or via email.
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