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The Rise of Global Stock Market Crash Probabilities

40 Pages Posted: 15 Jul 2012  

Thijs D. Markwat

Robeco Asset Management

Date Written: June 7, 2012

Abstract

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.

Keywords: Crashes, Stock Markets, Copulas, Dependence, Asymmetry

JEL Classification: G100, F3

Suggested Citation

Markwat, Thijs D., The Rise of Global Stock Market Crash Probabilities (June 7, 2012). Available at SSRN: https://ssrn.com/abstract=2105557 or http://dx.doi.org/10.2139/ssrn.2105557

Thijs Dingeman Markwat (Contact Author)

Robeco Asset Management ( email )

Weena 850
3014 DA
Rotterdam
Netherlands

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