Spillover Effects from the U.S. Financial Crisis: Some Time-Series Evidence from National Stock Returns

Abstract

This paper examines the degree of interdependence between national stock market returns for 17 advanced economies and the United States for various sub-periods from January 1973 to February 2009. The examination is based on time-series techniques including both single equation (ordinary least squares and generalized method of moments) and system approaches (structural vector autoregressive process). We find an increasing degree of interdependence between national stock market returns over time as well as spillover effects from a shock to U.S. stock market returns to the advanced economies. The main focus of our paper is to examine interdependence and spillover effects for the pre- and post-turmoil periods that characterize the recent U.S. financial crisis. Our findings indicate that the degree of interdependence and spillover effects were greatest after the emergence of the U.S. subprime mortgage meltdown in the summer of 2007, and even more so after the collapse of Lehman Brothers in September 2008. The empirical results indicate varying degrees of interdependence and spillover effects between the different advanced countries and the United States in the earlier decades. However, the results become fairly uniform across all the countries after the emergence of the U.S. financial crisis.

Keywords: U.S. financial crisis, interdependence, spillover effects, stock market returns

JEL Classification: F36, G15