What Explains Stock Markets'Vulnerability to the 2007-2008 Crisis?

42 Pages Posted: 20 Apr 2016

See all articles by Tatiana Didier

Tatiana Didier

World Bank

Inessa Love

World Bank - Development Economics Data Group (DECDG)

Maria Soledad Martinez Peria

International Monetary Fund (IMF)

Date Written: March 1, 2010

Abstract

This paper examines the determinants of stock markets' vulnerability to the 2007-2008 crisis. Given that the United States (US) was the crisis epicenter, the authors analyze the factors driving the co-movement between US returns and stock returns in 83 countries. The analysis distinguishes between the period before and after the collapse of Lehman Brothers. The findings indicate that the main channel of transmission was financial. There is also evidence of a "wake-up call" or "demonstration effect" in the first stage of the crisis, because countries with vulnerable banking and corporate sectors exhibited higher co-movement with the US market. However, despite a collapse in trade across countries, the analysis does not find support for this channel of transmission.

Keywords: Debt Markets, Mutual Funds, Markets and Market Access, Economic Theory & Research, Emerging Markets

Suggested Citation

Didier, Tatiana and Love, Inessa and Martinez Peria, Maria Soledad, What Explains Stock Markets'Vulnerability to the 2007-2008 Crisis? (March 1, 2010). World Bank Policy Research Working Paper No. 5224. Available at SSRN: https://ssrn.com/abstract=1565985

Tatiana Didier (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
(202)458-1525 (Phone)

Inessa Love

World Bank - Development Economics Data Group (DECDG) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/ilove

Maria Soledad Martinez Peria

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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