The Rise of Global Stock Market Crash Probabilities
Thijs D. Markwat
Robeco Asset Managment
June 7, 2012
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.
Number of Pages in PDF File: 40
Keywords: Crashes, Stock Markets, Copulas, Dependence, Asymmetry
JEL Classification: G100, F3working papers series
Date posted: July 15, 2012
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