International Equity Markets Interdependence: Bigger Shocks or Contagion in the 21st Century?

32 Pages Posted: 1 Nov 2016 Last revised: 20 Jul 2017

See all articles by Giovanna Bua

Giovanna Bua

European Central Bank (ECB)

Carmine Trecroci

University of Brescia

Date Written: July 19, 2017


Abstract This paper investigates the nature of shocks across international equity markets and evaluates the shifts in their comovements at a business-cycle frequency. Using an “identification through heteroskedasticity” methodology, we compute the impact coefficients on the common and country-specific shocks to stock returns. We then establish three key results regarding the recent comovement amongst returns. First, across all indices, persistent high-volatility spells always coincide with macroeconomic slowdowns. This confirms that market volatility increases as a result of shifts in the perception of macroeconomic risk. Second, there is a rise in the observed responses of international stock returns to common shocks during turbulent periods; such increase is largely attributable to bigger shocks (heteroskedasticity of fundamentals) rather than to breaks in the transmission mechanism or increased structural interdependence between markets. This holds for the Great Financial Crisis too. Third, since around the turn of the new millennium, returns have been hit more often by high-volatility common shocks, likely because of larger and more persistent macroeconomic disturbances.

Keywords: International equity markets, Volatility, Regime switching, Structural transmission

JEL Classification: C32, C51, G15

Suggested Citation

Bua, Giovanna and Trecroci, Carmine, International Equity Markets Interdependence: Bigger Shocks or Contagion in the 21st Century? (July 19, 2017). Available at SSRN: or

Giovanna Bua

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Carmine Trecroci (Contact Author)

University of Brescia ( email )

Via San Faustino 74B
Brescia, 25122

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