What Explains Stock Markets’ Vulnerability to the 2007–2008 Crisis?

What Explains Stock Markets’ Vulnerability to the 2007–2008 Crisis?

This paper examines the determinants of stock markets' vulnerability to the 2007-2008 crisis. Given that the United States (US) was the crisis epicenter, the authors analyze the factors driving the co-movement between US returns and stock retu...

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Bibliographic Details
Main Authors:	Didier, Tatiana, Love, Inessa, Peria, Maria Soledad Martinez
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ASSET ALLOCATION ASSET RATIOS ASSET VALUES ASSETS RATIO ASYMMETRIC INFORMATION BALANCE OF PAYMENT BALANCE OF PAYMENTS BANK ACTIVITIES BANK LENDING BANK LIQUIDITY BANK POLICY BANK REGULATION BANKING ASSETS BANKING REGULATION BANKING SECTOR BILATERAL TRADE BOND BOND MARKETS BUDGET DEFICIT BUDGET SURPLUS CAPITAL ACCOUNT CAPITAL ADEQUACY CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MARKET CAPITAL MARKET DEVELOPMENT CASH FLOWS CENTRAL BANK COMMODITY COMMODITY PRICES COMPETITIVENESS COMPOSITE INDEX CORPORATE DEBT COUNTRY DUMMIES COUNTRY FIXED EFFECTS COUNTRY RISK CREDIT DEFAULT CREDIT DEFAULT SWAP CREDIT RATINGS CREDITORS CRISES IN EMERGING MARKETS CRISIS COUNTRY CURRENCY CURRENCY CRISES CURRENT ACCOUNT BALANCE DATA AVAILABILITY DEBT LEVELS DEBT OBLIGATIONS DEPOSIT DEPOSIT MONEY BANKS DEVELOPING COUNTRIES DOMESTIC STOCK EFFECT OF LIQUIDITY EMERGING MARKETS EQUITY HOLDINGS EQUITY MARKET EQUITY PORTFOLIOS EQUITY RETURNS EXCHANGE RATE EXCHANGE RATE MOVEMENTS EXCHANGE RATES FEDERAL RESERVE FINANCE CORPORATION FINANCIAL ANALYSTS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL EXPOSURE FINANCIAL EXPOSURES FINANCIAL FLOWS FINANCIAL INSTABILITY FINANCIAL INSTITUTIONS FINANCIAL INTEGRATION FINANCIAL MARKET FINANCIAL MARKETS FINANCIAL OPENNESS FINANCIAL STRUCTURE FINANCIAL STUDIES FOREIGN DIRECT INVESTMENT FOREIGN EQUITY FOREIGN HOLDINGS FOREIGN INVESTMENTS FOREIGN INVESTORS FOREIGN MARKETS FOREIGN PORTFOLIO FOREIGN PORTFOLIO INVESTORS GDP GLOBAL EQUITY GLOBAL EQUITY MARKET GLOBAL EXCHANGE GLOBAL MARKET GOVERNMENT BUDGET GROWTH RATE HOLDING HOUSING FINANCE INCOME INCOME EFFECT INDEBTEDNESS INSURANCE INSURANCE PRODUCTS INTEREST EXPENSES INTEREST PAYMENTS INTEREST RATE INTERNATIONAL ASSET INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL ECONOMICS INTERNATIONAL EQUITY INTERNATIONAL FINANCE INTERNATIONAL FINANCIAL CONTAGION INTERNATIONAL FINANCIAL MARKETS INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL FINANCIAL SYSTEM INTERNATIONAL INVESTMENT INTERNATIONAL INVESTORS INTERNATIONAL RESERVES INTERNATIONAL SETTLEMENTS INVESTMENT ASSETS INVESTMENT BANKING LIQUID ASSETS LIQUID BANKS LIQUID MARKETS LIQUIDITY LIQUIDITY RATIO LIQUIDITY VARIABLE LOAN LOAN OBLIGATIONS LOCAL CAPITAL MARKET LOCAL MARKET LOCAL MARKETS LOCAL STOCK MARKET MACROECONOMIC SHOCKS MACROECONOMIC VULNERABILITIES MACROECONOMIC VULNERABILITY MARKET CAPITALIZATION MARKET CONTAGION MARKET DATA MARKET INTEGRATION MARKET LIQUIDITY MARKET PERFORMANCE MARKET RETURN MARKET RETURNS MARKET SIZE MARKET TURNOVER MERCHANDISE MERCHANDISE EXPORTS MORTGAGE MORTGAGE DEBT MORTGAGE LENDING MORTGAGE MARKET MORTGAGE MARKETS MORTGAGE-BACKED SECURITIES MUTUAL FUND MUTUAL FUND INVESTMENT OPEN COUNTRIES OUTPUTS POLICY RESPONSES PORTFOLIO PORTFOLIO INFLOWS PORTFOLIO INVESTMENT PORTFOLIOS POSITIVE COEFFICIENTS PRICE CHANGES PRIVATE CAPITAL PRIVATE CAPITAL FLOWS PRIVATE CREDIT PRIVATE SECTOR DEVELOPMENT REAL ESTATE REAL GDP RESERVES RESIDENTIAL MORTGAGES RETURN RETURN ON ASSETS RETURNS RETURNS DATA RISK AVERSION SECURITIES SHARE OF EQUITY SHORT-TERM DEBT SPREAD STOCK MARKET STOCK MARKET CAPITALIZATION STOCK MARKET INDEX STOCK MARKET LIQUIDITY STOCK MARKET PRICES STOCK MARKET RETURN STOCK MARKET RETURNS STOCK MARKETS STOCK PRICE STOCK RETURN STOCK RETURNS STOCKS SUPERVISION OF BANKS TERMS OF CAPITAL THIRD MARKETS TIME DUMMIES TOTAL DEBT TREASURY TURNOVER RATIO VOLATILITY WEALTH WORLD DEVELOPMENT INDICATOR WORLD DEVELOPMENT INDICATORS
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100301104305 http://hdl.handle.net/10986/3711

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Summary:	This paper examines the determinants of stock markets' vulnerability to the 2007-2008 crisis. Given that the United States (US) was the crisis epicenter, the authors analyze the factors driving the co-movement between US returns and stock returns in 83 countries. The analysis distinguishes between the period before and after the collapse of Lehman Brothers. The findings indicate that the main channel of transmission was financial. There is also evidence of a "wake-up call" or "demonstration effect" in the first stage of the crisis, because countries with vulnerable banking and corporate sectors exhibited higher co-movement with the US market. However, despite a collapse in trade across countries, the analysis does not find support for this channel of transmission.

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