Dynamic Linkages and the Propagation Mechanism Driving Major International Stock Markets: An Analysis of the Pre-and Post-Crash Eras

Quarterly Review of Economics and Finance, Vol. 37 No. 4, Winter 1997

Posted: 12 Jan 1998  

Rumi Masih

Goldman Sachs Asset Management

Abul M. M. Masih

King Fahd University of Petroleum & Minerals (KFUPM) - Department of Finance & Economics (FINEC)

Abstract

The stock market crash of October 1987 earmarked fears of a deep-seated financial crisis. In recent years, while there has been a number of empirical studies devoted to examinations of the number of common trends in a system of stock price indexes, only a minority has focused on what effect the crash has had on the characteristics [namely, the amount of co-movements amongst markets, their dynamic linkages, and implications for the transmission or propagation mechanism] of major stock markets. In this paper, we demonstrate how the techniques of unit root testing, cointegration, vector error-correction modelling (VECM) and forecast error variance decomposition (VDC) analysis, may be used to shed some light on these concerns in the context of six major international stock markets. Using two non-overlapping samples, we find evidence of a single conintegrating vector (or five common trends) over each of the pre-and post crash samples. A VECM is then constructed in which the temporal causal dynamics are examined, followed by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables including its own. Results tend to broadly indicate: 1. the crash does not appear to have affected the relative leading role played by the US market over other markets, 2. the German and British markets seem to have become more dependent on other markets over the post-crash era relative to the pre-crash, 3. finally, this paper also provides confirming evidence that, in general, the crash has brought about a greater interaction amongst markets, with a greater role for fluctuations in explaining shocks across markets (including that for the US).

JEL Classification: G12, G14, G15, F3

Suggested Citation

Masih, Rumi and Masih, Abul M. M., Dynamic Linkages and the Propagation Mechanism Driving Major International Stock Markets: An Analysis of the Pre-and Post-Crash Eras. Quarterly Review of Economics and Finance, Vol. 37 No. 4, Winter 1997. Available at SSRN: https://ssrn.com/abstract=52540

Rumi Masih (Contact Author)

Goldman Sachs Asset Management ( email )

32 Old Slip
New York, NY 10005
United States
212-902-4410 (Phone)
212-346-4402 (Fax)

Abul Mansur M. Masih

King Fahd University of Petroleum & Minerals (KFUPM) - Department of Finance & Economics (FINEC) ( email )

Dhahran 31261
Saudi Arabia

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