Contagion in Financial Markets after September 11 - Myth or Reality?
Posted: 27 May 2003
Abstract
Major global events can lead to a change in the cross-country correlation of assets. Using stock prices from 25 economies, we test whether the terrorist attack in the U.S. on September 11, 2001, resulted in a contagion - an increase in correlation across global financial markets. Unlike prior works on contagion, we model the intrinsic heteroskedasticity. Our results indicate that international stock markets, particularly in Europe, responded closely to United States stock market shocks in the three to six months after the crisis than before. Our evidence suggests that the benefits of international diversification in times of crisis are substantially diminished.
JEL Classification: F30, F32, G15, C53
Suggested Citation: Suggested Citation