Transmission of Volatility between Stock Markets

43 Pages Posted: 5 Jul 2004 Last revised: 11 Jun 2008

See all articles by Mervyn King

Mervyn King

Bank of England; National Bureau of Economic Research (NBER)

Sushil Wadhwani

Bank of England - Monetary Policy Committee

Date Written: March 1989

Abstract

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.

Suggested Citation

King, Mervyn A. and Wadhwani, Sushil, Transmission of Volatility between Stock Markets (March 1989). NBER Working Paper No. w2910. Available at SSRN: https://ssrn.com/abstract=459420

Mervyn A. King (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
44-20-7601-4963 (Phone)
44-20-7601-3047 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sushil Wadhwani

Bank of England - Monetary Policy Committee ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
+44 20 7601 3235 (Phone)

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