Spillover effects from the U.S. financial crisis: Some time-series evidence from national stock returns

Transcription

1 Spllover effecs from he U.S. fnancal crss: Some me-seres evdence from naonal sock reurns by Apanard Penny Angknand Mlken Insue James R. Barh Auburn Unversy and Mlken Insue Hyeongwoo Km Auburn Unversy Sepember 2009 Forhcomng The Fnancal and Economc Crses: An Inernaonal Perspecve Benon Gup, Edor Edward Elgar Publshng The auhors are graeful for helpful commens from Levan Efremdze, Thomas D. Wlle and Jnggng Xu.

2 Spllover effecs from he U.S. fnancal crss: Some me-seres evdence from naonal sock reurns Absrac Ths paper examnes he degree of nerdependence beween naonal sock marke reurns for 17 advanced economes and he Uned Saes for varous sub-perods from January 1973 o February The examnaon s based on me-seres echnques ncludng boh sngle equaon (ordnary leas squares and generalzed mehod of momens) and sysem approaches (srucural vecor auoregressve process). We fnd an ncreasng degree of nerdependence beween naonal sock marke reurns over me as well as spllover effecs from a shock o U.S. sock marke reurns o he advanced economes. The man focus of our paper s o examne nerdependence and spllover effecs for he pre- and pos-urmol perods ha characerze he recen U.S. fnancal crss. Our fndngs ndcae ha he degree of nerdependence and spllover effecs were greaes afer he emergence of he U.S. subprme morgage meldown n he summer of 2007, and even more so afer he collapse of Lehman Brohers n Sepember The emprcal resuls ndcae varyng degrees of nerdependence and spllover effecs beween he dfferen advanced counres and he Uned Saes n he earler decades. However, he resuls become farly unform across all he counres afer he emergence of he U.S. fnancal crss. JEL: F36, G15 Keywords: U.S. fnancal crss, nerdependence, spllover effecs, sock marke reurns

3 1. Inroducon The collapse of U.S. housng prces and he ensurng morgage marke meldown ha began durng he summer of 2007 rggered a global fnancal crss. Unlke he fnancal crses ha sruck Souheas Asan counres n he summer of 1997, he more recen crss nally sared n one of he mos advanced counres n he world, namely he Uned Saes. As a resul of hs crss, here s wdespread neres n undersandng he exen o whch he ncreasng nerdependences n rade and fnancal lnkages among counres n recen years conrbued o spllover effecs from he Uned Saes o oher counres. There s ample facual evdence ha naonal markes have become more ner-conneced wh one anoher wh respec o cross-border rade and capal flows durng he pas few decades (e.g., see Forbes and Chnn, 2004). I seems reasonable o assume ha hese cross-border marke lnkages have ncreased he lkelhood for shocks n an economcally and fnancally mporan counry o be ransmed nernaonally. Ths would parcularly be he case as regards a counry lke he Uned Saes. One would hence expec szable spllovers from he recen and severe U.S. fnancal crss o oher counres gven he overall mporance of he Uned Saes for he world s economy and fnancal markes. There s, however, as ye no or lmed emprcal evdence supporng such a conenon as regards hs parcular crss. Bu here are sudes nvolvng earler me perods, whch nclude some dsrupve epsodes. For example, n an examnaon of German and U.S. sock markes durng , Bonfglol and Favero (2005) do no fnd any evdence of a co-movemen or nerdependence n sock marke reurns beween hese wo economes n he long run. However, hey do fnd ha reurns n hese wo markes do end o move ogeher durng perods of urmol. Also, n a more comprehensve sudy, Bekaer, Harvey and Ng (2005) examne he degree of regonal and global negraon usng sock marke 1

4 reurns n 22 counres durng They fnd ha he degree of negraon of sock reurns n hese counres s no as grea as was generally hough a he me. The mos recen fnancal crss n he Uned Saes, he wors snce he Grea Depresson, provdes a good opporuny o reassess he degree o whch any nerdependences among sock marke reurns n dfferen counres ha exsed may have changed over me, and especally pror o, durng, and afer varous evens characerzng he crss. Our reassessmen s based on an examnaon of he degree of co-movemen beween naonal sock marke reurns n 17, and n some cases 14, advanced economes and he Uned Saes from January 1973 o February To assess he degree of co-movemen, one mgh smply proceed by producng varous scaer plos of sock reurns for each of he counres and he Uned Saes for each decade, some of whch are shown n Fgure 1. Based on hs approach, here appears o be evdence of hgher posve correlaons and hus ncreased nerdependence over me, especally durng he decade of he 2000s. No srong conclusons can be reached, however, unl he evdence provded by hese plos s confrmed wh more formal me seres echnques o deermne wheher here has ndeed been a sgnfcan ncrease n he co-movemen of sock marke reurns across naonal borders. Such echnques are also approprae o assess wheher here have been sgnfcan spllover effecs from he Uned Saes o oher developed counres. Pursung hs more rgorous approach n urn may help provde nformaon abou he reasons he curren crss has been a ruly global one and herefore may evenually las longer han would have been he case whou an ncreased nerdependence among counres. In hs regard, we carefully examne he pre- and pos-urmol perods usng he emergence of he U.S. fnancal crss n Augus

5 and he bankrupcy of Lehman Brohers n Sepember 2008 as dang or cu-off pons for deecng spllover effecs from he Uned Saes o oher pars of he world. [Fgure 1 here] Alhough here have been many prevous emprcal sudes analyzng he degree of comovemen n sock marke reurns across counres, he mehodologes employed n hose mos closely relaed o our sudy have some lmaons, as wll be dscussed below. We aemp o address hese lmaons by comparng he resuls from boh a sngle equaon and sysem approach n our examnaon of naonal sock marke reurn co-movemens. In he sngle equaon approach, we provde resuls for boh ordnary leas squares (OLS) and generalzed mehod of momens (GMM) esmaons. We fnd ha he resuls from hese wo mehods yeld somewha dfferen resuls, wh hose from he OLS esmaon beng less relable. In he sysem approach, we use a srucural vecor auoregressve process (SVAR) o capure he conemporaneous and dynamc responses of sock reurns n oher counres o a shock n U. S. sock reurns. Ths mehodology s superor o he reduced-form VAR employed by Forbes and Rgobon (2002) because allows one o denfy srucural dosyncrac shocks gven approprae denfyng assumpons. Based upon our emprcal resuls, we fnd evdence of varyng degrees of nerdependence n sock marke reurns beween he varous counres n our sample and he Uned Saes over me. In general, however, he degree of sock marke nerdependence beween he many of he advanced economes n our sample and he Uned Saes remaned relavely low durng he 1970s and 1980s bu hen ncreased durng he 1990s. In addon, he mpulse-response analyss shows ha boh he shor- and long-run responses or spllover effecs of many of hese advanced counres naonal sock reurns o a shock n U.S. sock reurns are 3

6 sgnfcan and larges durng he 2000s. Alhough here s no complee unformy n resuls for each and every counry over me, here noneheless has been a change n he degree of nerdependence beween he dfferen counres and he Uned Saes over me. Focusng more specfcally on he perod of he recen crss, we expec ha foregn sock reurns n hose counres wh he hghes degrees of nerdependences wll have he sronges spllover effecs o movemens n U.S. sock reurns afer boh he emergence of he U.S. fnancal crss n he summer of 2007 and he falure of Lehman Brohers n Sepember We do fnd ha for all of he 17 advanced economes n our sample here s a greaer degree of her sock marke reurn co-movemens wh U.S. sock marke reurns afer he emergng crss n Augus In he case of Japan, however, even hough s sock marke reurns became more nerdependen wh U.S. marke reurns durng he 2000s, as compared o he oher advanced counres, Japanese reurns dsplay he leas degree of co-movemen and smalles response o shor and long run sock reurn shocks orgnang n he Uned Saes. Furhermore, he shor-run mpulse responses or spllover effecs of he dfferen naonal sock reurns o a shock n U.S. reurns afer he bankrupcy of Lehman Brohers are greaer n all counres n our sample, excep Japan and Swzerland. The nex secon presens several sylzed facs o demonsrae he ncreasng nerconnecedness beween he advanced counres n our sample and he Uned Saes. I also provdes a bref revew of relaed leraure regardng he co-movemen of sock marke reurns among counres. Secon 3 presens our emprcal model and dscusses he esmaon echnques employed, whle Secon 4 descrbes he daa and presens he emprcal resuls. Some concludng remarks are repored n he las secon. 4

7 2. Growng nerdependences beween advanced economes and he Uned Saes Wha makes he curren global crss dfferen from prevous fnancal crses s no only s severy bu ha he severy s n large par due o he Uned Saes. The reason s ha, as Table 1 shows, U.S. GDP s slghly more han one-ffh of he world oal and U.S. sock marke capalzaon s abou one-hrd of world marke capalzaon. The Uned Saes s also he larges mporer n he world (Table 1). Ths means ha a declne n U.S. GDP and U.S. sock marke capalzaon can adversely affec oher counres hrough varous rade and fnancal lnkages. Smlar daa for he oher 17 counres n our sample are presened for comparave purposes. [Table 1 here] To elaborae on he poenal channels hrough whch U.S. shocks may have spread o oher economes, Tables 2 and 3 provde a few sylzed facs regardng rade and capal flow lnkages beween he Uned Saes and he oher advanced economes n our sample. Ths ype of daa s mporan because he spread of a fnancal crss globally may occur or worsen because an adverse shock n one large counry can be ransmed nernaonally hrough varous channels nvolvng mpor/expor markes and capal markes as well as hrough changes n exchange raes and commody prces (see, for example, Hernández and Valdés, 2001, Imbs, 2004, Ehrmann, Frazscher, and Rgobon, 2005, Bayoum and Swson, 2008). Of course, he magnude of he effec of a shock wll depend o a large degree on he srengh of lnkages beween counres. Pursung hs lne of reasonng, Table 2 shows ha rade lnkages beween he U.S. and our oher advanced economes has changed over me. As may be seen, on average boh he shares of her oal expors and mpors o he Uned Saes have slghly decreased over me. 5

8 Accordng o he Inernaonal Moneary Fund (2007), he general and slgh decrease n he mporance of rade among many counres wh he Uned Saes s due o rapd growh n nraregonal rade. In addon, he Uned Saes now rades more wh emergng marke economes and oher developng counres, and o a lesser exen wh Japan and he Euro area counres. [Table 2 here] Table 3 provdes some lmed nformaon on cross-border fnancal flows beween our 17 counres and he Uned Saes. These daa show he degree o whch each of our sample counres has porfolo nvesmen n he Uned Saes as well as he mporance of U.S. porfolo nvesmen for each of hese counres. These daa are somewha smlar n paern o he rade daa dscussed earler nsofar as here has been a slgh decrease n such fnancal flows from 2001 o 2007 (earler blaeral porfolo nvesmen on a yearly bass are no avalable). [Table 3 here] Despe he slgh declne n he rade and fnancal lnkages, he co-movemen of sock reurns beween our oher sample economes and he Uned Saes appear o have been subsanally ncreasng snce he 1970s (see Fgure 1). 1 Ths paern suggess ha sock marke lnkages may be an approprae channel o focus on n examnng he ransmsson of shocks assocaed wh he collapse of he U.S. morgage and cred markes and correspondng spllover effecs o oher counres around he world. 2 The man reason s ha sock prces reflec o a large degree fuure economc growh n counres and herefore dsrupons n cred markes can 1 The scaer plos are que smlar for he oher counres n our sample. 2 The channels hrough whch a crss spreads are dfferen for dfferen crss epsodes. Hernández and Valdés (2001), for example, fnd ha he rade lnkage s he mporan ransmsson channel durng he Thaland and Brazlan crses, whereas fnancal compeon s he only relevan channel n he case of he Russan crss. 6

9 adversely affec rade, fnancal flows and more broadly economc growh and employmen. These developmens, n urn, can be conemporaneously ncorporaed n sock prces. Indeed, hs has been he case wh he global crss, wh world rade havng declned and recessons have occurred n many counres, and sock prces and reurns also havng declned from her hghs n earler years. We herefore focus our sudy on sock marke reurns as a broad measure o assess nerdependences among he Uned Saes and oher counres wh well esablshed sock markes. There have been many emprcal sudes esng he exen o whch here are comovemens n asse prces across counres. These ess have been ulzed o examne sock marke nerdependence, fnancal marke negraon, he ransmsson of shocks across naonal borders, and fnancal conagon. An nfluenal sudy by Kng and Wadhwan (1990), for example, examnes wheher here has been a change n correlaon coeffcens beween Japan, U.K., and U.S. sock reurns before and afer he sock marke crash of They fnd a sgnfcan ncrease n he coeffcens afer he crash. I s argued by hem ha sock marke reurns fell jonly ogeher afer he crash because he prvae nformaon se conans boh dosyncrac and sysemac componens. Berero and Mayer (1990) and Lee and Km (1993), as oher examples, adop a smlar approach o a boarder se of counres and fnd furher evdence ha correlaon coeffcens for sock reurns beween he Uned Saes and he oher counres sgnfcanly ncreased afer he 1987 crash. The resuls of he Berero and Mayer sudy are based upon boh daly and monhly sock reurns for a sample of 23 ndusralzed and developng counres, whle hose of he Lee and Km sudy are based upon weekly reurns for 12 major counres. 7

10 Forbes and Rgobon (2002), n an mporan sudy, mprove on esng for sock reurn comovemens based on correlaon coeffcens and consder he Mexcan crss n 1994 o 1995, he Asan crss n 1997, and he U.S. sock marke crash n They argue ha smple correlaons are based due o he presence of heeroskedascy n marke reurns. Durng a crss perod, marke volaly ncreases subsanally and hereby renders he assumpon of a consan varance nvald. Whou a correcon for he bas nroduced by a non-consan varance he magnude of cross-marke correlaons wll be oversaed, hereby poenally leadng o false conclusons abou he exsence of conagon across counres. They herefore es for comovemens n sock reurns n dfferen counres by calculang correlaon coeffcens from a reduced-form VAR model and hen make adjusmens for any bas ha arses n he leas squares esmaon of a sngle equaon. They fnd vrually no evdence of conagon durng he crses hey examne, and conclude ha a greaer degree of sock marke reurn co-movemens durng he crss perods smply reflec a connuaon of he rend n marke nerdependence ha had exsed n he sable perods pror o he crses. Ther mehodology, however, has some lmaons. In parcular, her bas correcon mehod assumes ha he rue bea coeffcens n her emprcal model are consan. Pu dfferenly, hey assume ha he degree of nerdependence across counres does no change over me. If hs assumpon s nvald, her esmaon mehod s napproprae. In addon, her reduced-form VAR model does no solae dosyncrac shocks. Whle some of he earler echnques used n esng for sock marke reurn nerdependence and conagon among counres have been mproved upon n several more recen sudes, he evdence regardng he exsence of conagon remans mxed. For nsance, Candelon, Hecq and Verschoor (2005) argue ha hey provde a sronger measure of co- 8

11 movemens based on he noon of common cycles. Smlar o he fndngs of Forbes and Rgobon (2002), hey fnd evdence of a hgh degree of sock marke co-movemen exss across all me perods, pre- and pos-crses, and hus no evdence of conagon n he case of he Asan crss and weak evdence of conagon n he case of he Mexcan crss. In conras, Bekaer, Harvey, and Ng (2005) and Corse, Percol, and Sbraca (2005) fnd evdence of conagon n he case of he Asan crss. The dfference n fndngs s due o he laer wo sudes dsngushng beween he dosyncrac and sysemac componens of sock marke reurns. In addon, Corse, Percol, and Sbraca argue ha he resuls of Forbes and Rgobon are hghly dependen on he specfcaon of he dosyncrac componen. Based on hese sudes, among ohers, becomes clear ha fnancal negraon, comovemens or nerdependence and conagon are dsncly used erms. However, he comovemen or nerdependence of sock marke reurns s a necessary, f no a suffcen condon, for he occurrence of conagon. In he nex secons, we mplemen a formal emprcal nvesgaon o examne he nerdependence beween 17 naonal sock marke reurns and U.S. sock marke reurns, focusng mos mporanly on he wo denfyng sub-perods of he U.S. crss. In he laer case, we also examne wheher here are sronger spllover effecs from he Uned Saes o he oher counres n he pos-crss perods. 3. Emprcal model 3.1 Unvarae approach Le p denoe he log of he sock prce ndex for counry and r = p p ) represen ( 1 he connuously compounded sock reurn a me. To sudy he conemporaneous comovemen of r and U.S. sock reurns, r US, one may employ he followng regresson equaon: 9

12 r US = α + β r + ε, (1) where ε s an dosyncrac shock n counry. If r US s orhogonal o ε, one can esmae β conssenly by he ordnary leas squares (OLS) esmaor. 3 When here are common facors ha govern he movemens n boh r and r US, however, he orhogonaly assumpon s unlkely o hold and alernave esmaors, such as he generalzed mehod of momens (GMM) esmaor, should be consdered. In he presence of seral correlaon and/or condonal heeroskedascy of ε, he sandard error needs o be correced appropraely Sysem approach When one s neresed n examnng he dynamc effecs of a srucural shock n U.S. sock reurns ha occurs on he sock reurns n oher counres, s convenen o use he followng srucural vecor auoregressve (SVAR) model: A 0 y = A1 y 1 + A2 y Ap y p + u, (2) where US US y = [ r r ]' s a vecor of covarance saonary sock reurns and u = [ u u ]' s a vecor of orhogonal srucural shocks wh un varances, ha s, The correspondng reduced-form VAR model s: ' Eu u = I. y = B1 y 1 + B2 y Bp y p + ε, (3) 3 Convenonal un-roo ess for he sock prce ndces mply ha he sock ndces are negraed of order one, ndcang ha sock reurns are covarance saonary. Ths means he usual fne sample and large sample properes of he OLS esmaor apply. 4 We use Andrew s (1991) quadrac specral kernel wh auomac bandwdh selecon mehod. 10

13 where 1 B = A0 A, = 1,2,..., p 1 ε = A u, Eε ε =, 0 where Σ s he varance-covarance marx. The VAR model (3) can be represened by he followng movng average represenaon: y = D L) ε = D( L) Cu, (4) ( where D( L) 1 = B( L) = ( I B1... Bp ) 1 and 1 0 C = A s he conemporaneous or shorrun response marx. We employ Sms (1980) mehod o jus-denfy he sysem of equaons (4) by assumng ha C s a lower-rangular marx, ha s, u does no affec US r conemporaneously. 5 Pu dfferenly, = P P = CC, where P s he Cholesk decomposon facor. Noe ha he shor-run response ( ψ ) of S he level varable p o US u s drecly obaned fromc, whereas he long-run response ( ψ L ) can be obaned by D 1) C = ( D C. ( j = 0 j ) The unvarae approach s used o es for he degree of nerdependence and comovemen, whereas he sysem approach s used o assess he magnude of any spllover effecs ha mgh exs. 4. Emprcal resuls 5 Ths may be a que resrcve assumpon n he case ha u s he srucural shock o he UK sock marke, for nsance. However, our resuls were qualavely smlar wh dfferen orderngs of he varables. 11

14 In examnng he nerdependence of sock marke reurns beween varous counres and he Uned Saes as well as he poenal spllover effecs durng he recen crss from he Uned Saes o he oher counres, we use weekly and monhly naonal sock marke reurns (obaned from Thomson Daasream) for he 18 advanced economes n our sample from January 1973 o February All he counres have well-developed sock markes, some wh large marke capalzaons such as France, Germany, Japan, Uned Kngdom and he Uned Saes and some wh small marke capalzaons (Table 1). These counres also represen dfferen regons of he world. To assess wheher here have been any broad changes n he degree of nerdependence over me, we esmae varous models for he enre sample perod as well as dfferen sub-perods (.e., each decade and pre- and pos-crss denfyng evens). 6 Tables 4-7 repor he resuls of our assessmen of wheher here have been changes n he degree of nerdependence of monhly naonal sock marke reurns over me beween he 14 sample counres and he Uned Saes usng boh sngle equaon and sysem approaches. 7 In Tables 8-11, we repor smlar resuls bu for changes n he co-movemens of weekly naonal sock marke reurns durng he mos recen decade, focusng on he pre- and pos-perods assocaed wh he U.S. fnancal crss. There are wo pos-crss perods we examne. The frs perod s he emergence of he subprme morgage marke meldown aken o be he frs week of Augus 2007 (Barh e al., 2009b). We also consder he hrd week of Sepember 2008 as an alernave sar dae when Lehman Brohers fled for bankrupcy. In boh cases, he pre-urmol 6 We focus on broad rends over me and do no focus on all he specfc perods of crss excep for he recen U.S. crss, whch s he man focus of our paper. 7 Due o a lack of daa, he resuls for sock marke reurn nerdependence beween Norway, Span and Sweden and he Uned Saes are no repored. 12

15 perod sars he frs week of 2000 and he pos-perod begns he same week as he occurrence of he wo evens. Based on he resuls repored n Tables 4-7, we fnd robus evdence of srong comovemen n sock marke reurns beween each and every one of he sample counres and he Uned Saes n he decade of he 2000s. The bea coeffcens of naonal sock reurns for each counry wh respec o hose for he Uned Saes obaned from boh he Ordnary Leas Squares (OLS) and Generalzed Mehod of Momens (GMM) esmaons n hs perod are sgnfcanly dfferen from zero a he 1% sgnfcance level n all cases (Tables 4 and 6). The evdence of sock marke reurn nerdependence durng he earler decades of he 1970s hrough he 1990s s mxed, dependng on whch esmaon echnque s employed. The coeffcens from he OLS esmaon (Table 4) are sgnfcan n nearly all cases and do no vary much over me, whereas he coeffcens from he GMM esmaon are generally nsgnfcan, parcularly for he 1970s and 1980s (Table 6). However, he GMM coeffcens do become sgnfcan n many counres n he 1990s and sgnfcan n all sample counres n he 2000s. The resuls for he OLS esmaon sugges ha sock markes always been nerdependen snce he early of 1970s, whch conradcs a general belef ha he exen of marke lnkages has been ncreasng over me. We beleve ha he GMM esmaes, whch suppor hs general belef, are more relable for several reasons. Frs, he GMM esmaes are more conssen wh he scaer plos of monhly sock marke reurns n Fgure 1, whch exhb weak correlaons beween he marke reurns n he earler decades. Second, he OLS esmaor s no even unbased and s nconssen 13

16 when he exogeney assumpon s volaed. Our nformal es shows ha hs s ndeed he case. 8 Thrd, he J-specfcaon es sascs for he over-denfyng resrcons proposed by Hansen (1982) ndcae ha he model specfcaon from he GMM esmaons repored n Tables 5-6 s good. [Tables 4-6 here] In sum, we fnd an ncreasng degree of sock marke reurn nerdependence beween oher advanced economes and he Uned Saes over me. For many of hese counres, he ncrease n nerdependence became parcularly evden durng and afer he 1990s. An neresng resul based on he GMM esmaon n Tables 5-6 s ha he change over me n sock marke reurn nerdependence for he ndvdual counres s reasonably unform. In parcular, he ncreased co-movemen of sock marke reurns wh he Uned Saes n he 2000s compared o he 1990s s clearly observed for he smaller advanced economes as measured by GDP and marke capalzaon (Table 1). Specfcally, he coeffcens n he 2000s become somewha larger and sascally sgnfcan for Ausrala, Ausra, Belgum, Denmark, Ialy, Neherlands, and Swzerland. For he larger advanced economes, Canada and Japan boh clearly share a smlar paern n ha here s greaer sock marke reurn nerdependence n he 2000s relave o he 1990s. In he case of France, Germany, and U.K., hey do no dsplay a smlar ncrease n nerdependence 8 We regressed US r on a consan, r, and US r 1. We obaned srong sgnfcanly posve coeffcens on r for all r 1 counres, whereas he coeffcens on US were mosly nsgnfcan. Therefore, seems ha he exogeney assumpon clearly fals. All resuls are avalable upon reques. 14

17 over he perod based on her slghly smaller coeffcens. However, when akng no accoun he much smaller sandard errors assocaed wh hese coeffcens ndcae sharper esmaes, one may conclude ha for hese counres o here has been an ncrease n nerdependence. The laer hree counres also have relavely hgh degrees of nerdependence as compared o he oher counres durng he 1990s. Hong Kong and Sngapore share a smlar paern o hese hree larger counres. In sum, even hough for a lmed number of counres here were hgh degrees on nerdependence n he earler decades, seems obvous ha sronger degrees of nerdependence n he 2000s were vrually everywhere n erms of eher larger coeffcens or smaller sandard errors. Our resuls on nerdependence are no fully conssen wh hose repored by Bekaer, Hodrck and Zhang (forhcomng) and Morona and Belra (2008), who fnd ha he comovemen of sock marke reurns have ncreased only among seleced counres, no all. Specfcally, whle hey fnd ncreased sock reurn co-movemen beween European counres and he Uned Saes over me, her resuls also ndcae ha U.S. sock marke reurns are less nerdependen wh Asan sock marke reurns. Bekaer, Hodrck and Zhang (forhcomng) base her resuls on aggregae porfolo reurns for 23 counres durng 1980 o 2005, whle Morona and Belra (2008) focus on four major markes, Germany, Japan, Uned Kngdom and he Uned Saes, over he perod 1973 o These fndngs, n conras o ours n some cases, sugges ha nvesors may sll benef from porfolo dversfcaon when dversfyng across a geographcally dverse group of counres. The dfferences n some of he fndngs may be due a greaer degree of nerdependence among counres ha occurred durng he recen crss, somehng ha he oher wo sudes could no have aken no accoun gven when hey were compleed. 15

18 Turnng o he ssue of spllover effecs, we can now compare he response of naonal sock reurns for oher counres o a U.S. reurn shock for he 2000s relave o ha n earler decades. Boh he shor-run and long-run responses n all markes o such a shock are subsanally larger and a leas sgnfcan a he 10% level n he 2000s. The long-run responses, however, are less sgnfcan and much smaller n earler decades (Table 7). To elaborae, a 1% negave shock orgnang from he Uned Saes occurrng n he 2000s leads o a drop n German sock reurns by 1.2% n he shor run. The nal negave shock ha affecs German sock reurns connues, yeldng a 1.8% declne n he long run. In he 1990s, n conras, he response of German sock reurns s 0.7% n he shor run, and an even smaller 0.5% n he long run (Fgure 2 and Table 7). [Table 7 here] [Fgure 2 here] Gven he evdence presened above of a hgher degree of sock marke reurn nerdependence beween our sample counres and he Uned Saes n he 2000s, we now nvesgae specfcally wheher here has been a change n he pre- and pos-u.s. fnancal crss degree of nerdependence usng weekly daa. If here has been an ncrease n nerdependence, hs would plausbly be an ndcaon ha he U.S. crss splled over subsanally more o oher advanced economes. In addon o examnng nerdependence, we esmaed he spllover effecs from a shock o U.S. sock marke reurns o our oher sample counres. The nerdependence resuls are based on he unvarae approach usng he GMM esmaors and repored n Tables 8 and 10. The spllover effecs are based on he sysem approach usng he coeffcens of mpulse responses from a VAR model and are repored n Tables 9 and 11. Tables 8 and 9 refer o he frs way used o denfy he pre- and pos-crss perods (emergng 16

19 crss), whle Tables 10 and 11 refer o he second way (Lehman Brohers falure), as dscussed earler. The resuls n Table 8 show ha he coeffcens for he co-movemen of sock reurns durng he pos-emergng crss perod subsanally ncrease for all bu wo counres compared o he pre-emergng crss perod n erms of boh magnude and sgnfcance. The excepons are he resuls for Germany and Japan, wh Germany becomng somewha less nerdependen wh he Uned Saes and he co-movemen beween sock reurns n Japan and he Uned Saes becomng sgnfcanly negave. As Table 10 shows, he evdence for ncreased sock marke reurn nerdependence afer Lehman Brohers fled for bankrupcy on Sepember, 14, 2008 compared o he pre-bankrupcy perod s very weak. Indeed, only n he case of Sngapore and he Uned Kngdom evdence of sgnfcanly greaer nerdependence. I should be noed n hs regard, however, ha here are relavely few observaons followng he collapse of Lehman Brohers (our observaons end n February 2009). In addon, he pre-epsode perod of Lehman Brohers bankrupcy ncludes he perod from Augus 2007 o Sepember 2008 durng whch we found a subsanal ncrease n naonal sock marke reurn co-movemen. The resuls from he mpulse response analyss confrm ha here are spllover effecs from U.S. sock marke reurns o he sock marke reurns of he oher advanced counres when he fnancal crss emerged n he Uned Saes (Table 9). For example, a 1% drop n U.S. sock reurns s assocaed wh a 1.05% shor run declne and a 1.28% long run declne n U.K. sock reurns. Before he crss emerged, he magnude of he spllover effec from a U.S. shock s smaller; a 1% drop n U.S. sock reurns s assocaed wh a 0.71% conemporaneous declne n U.K. sock marke reurns and o a somewha smaller 0.59% declne n he long run. A smlar paern holds for he oher counres. 17

20 [Tables 8 and 9 here] Followng Lehman Brohers collapse, alhough he GMM esmaons do no ndcae a paern of large ncreases n he co-movemen of sock reurns for he 17 sample counres and he Uned Saes (Table 9), he mpulse response analyss n Table 11 ndcaes almos always larger spllover effecs han n he pre-crss perod. In parcular, he magnude of boh shor and long run naonal sock reurn responses o a shock n U.S. sock reurns s larger afer he falure of Lehman Brohers n all sample counres, excep Japan. In addon, he conemporaneous responses n counres o a U.S. shock are also hgher durng he pos-lehman Brohers falure han he pos-emergng crss perod, excep n he cases of Japan and Swzerland. These resuls sugges ha he bankrupcy of Lehman Brohers conrbued he mos o spreadng he crss worldwde. Frank and Heko (2009) and Dooley and Huchson (forhcomng) also fnd ha he collapse of Lehman Brohers rggered he global fnancal crss. Ther sample, unlke ours, focuses manly on emergng marke economes, however. [Tables 10 and 11 here] 5. Concluson We generally fnd an ncrease n nerdependence beween naonal sock marke reurns over me as well as spllover effecs from a shock o U.S. sock reurns o oher advanced counres. Furhermore, we also fnd ha he resuls are reasonably unform for counres, boh wh respec o nerdependence and spllover effecs. Mos mporanly, gven he focus of our paper, we fnd ha spllover effecs from he Uned Saes o oher ndusral counres were greaes afer he emergence of he U.S. subprme morgage marke meldown n he summer of 2007, especally afer he collapse of Lehman Brohers. 18

21 Our resuls as well as hose of ohers rase he ssue of he underlyng reason ha he degree of sock reurn nerdependence among he counres wh he Uned Saes ncreased and he spllover effecs became greaer afer as compared o before he U.S. fnancal crss. Some possble explanaons for he changng paern and magnude n he co-movemen of naonal sock marke reurns are as follows. Frs, he curren global crss was rggered n he Uned Saes, whch has he larges economy and he bgges fnancal markes n he world. In esmang and comparng he oupu spllover effecs of shocks from he Uned Saes, he Euro area and Japan o oher pars of he world, Bayoum and Swson (2008) fnd ha he larges spllovers orgnaed n he Uned Saes. They also fnd ha fnancal lnkages are he mos mporan channel n ransmng shocks beween he counres. Second, counres are now affeced o a greaer exen by global shocks han before, and o a lesser exen by counryspecfc shocks. As Forbes and Chnn (2004) argue, counry-specfc facors have become less mporan n explanng a counry s sock marke reurns, whle ncreasng blaeral rade and fnancal lnkages have become more mporan facors. Echengreen e al. (2009) also show ha he ably of a relavely small number of common facors o explan he varaon n he rskness (measured by cred defaul swap premums) of fnancal nsuons n dfferen counres rose o an exceponally hgh level afer he emergence of he U.S. fnancal crss. Thrd, he concern over counerpary rsk reached a record hgh durng he umuluous perod. Ths conrbued o a lqudy freeze, cred crunch and flgh o safey n so far as heghened uncerany and loss of confdence undermned he proper funconng of he global fnancal sysem (Barh, L and Phumwasana, 2009). The boom lne s ha much more work remans o be done o beer assess he basc facors ha can explan he degree o whch a change n nerdependence among counres and a 19

22 change n he magnude of spllover effecs from one counry o ohers conrbued o he severy and global naure of he recen crss. Ths s essenal o beer asss polcymakers n promong greaer regulaory responsbly for mgang, f no elmnang, he lkelhood of anoher sysemc fnancal crss. 20

23 References Andrews, Donald W.K. (1991). Heeroskedascy and Auocorrelaon Conssen Covarance Marx Esmaon. Economerca, 59(3), Barh, James R., Tong L and Trphon Phumwasana (2009a). The U.S. Fnancal Crss: Cred Crunch and Yeld Spreads. In RBS Reserve Managemen Trends, Rober Prngle and Nck Carver (eds), Cenral Bankng Publcaons Ld. Barh, James R., Tong L, Wenlng Lu, Trphon Phumwasana and Glenn Yago (2009b). The Rse and Fall of he U.S. Morgage and Cred Markes: A Comprehensve Analyss of he Meldown. New Jersey: John Wley & Sons, Inc. Bayoum, Tamm and Andrew Swson (2008). Foregn Enanglemens: Esmang he Source and Sze of Spllovers Across Indusral Counres. IMF Saff Papers, Inernaonal Moneary Fund. Bekaer, Gree, Campbell R. Harvey, and Angela Ng (2005). Marke Inegraon and Conagon. Journal of Busness, 78(1), Bekaer, Gree, Rober J. Hodrck and Xaoyan Zhang (forhcomng). Inernaonal Sock Reurn Comovemens. Journal of Fnance. Berero, Elsabea and Coln Mayer (1990). Srucure and Performance: Global Inerdependence of Sock Markes around he Crash of Ocober European Economc Revew, 34, Bonfglol, Alessandra and Carlo A. Favero (2005). Explanng Co-Movemens beween Sock Markes: The Case of US and Germany. Journal of Inernaonal Money and Fnance, 24,

24 Candelon, Berrand, Alan Hecq, and Wllem F.C. Verschoor (2005). Measurng Common Cyclcal Feaures Durng Fnancal Turmol: Evdence of Inerdependence No Conagon. Journal of Inernaonal Money and Fnance, 24, Corse, Gancarlo, Marcello Percol, and Massmo Sbraca (2005). Some Conagon, Some Inerdependence: More Pfalls n Tess of Fnancal Conagon. Journal of Inernaonal Money and Fnance, 24, Dooley, Mchael and Mchael Huchson (forhcomng). Transmsson of he U.S. Subprme Crss o Emergng Markes: Evdence on he Decouplng-Recouplng Hypohess. Journal of Inernaonal Money and Fnance. Echengreen, Barry, Ashoka Mody, Mlan Nedeljkovc, and Luco Sarno (2009). How he Subprme Crss Wen Global: Evdence from Bank Cred Defaul Swap Spreads. NBER Workng Paper no , Naonal Bureau of Economc Research. Ehrmann, Mchael, Marcel Frazscher, and Robero Rgobon (2005). Socks, Bonds, Money Markes and Exchange Raes: Measurng Inernaonal Fnancal Transmsson. NBER Workng Paper no , Naonal Bureau of Economc Research. Forbes, Krsn J. and Robero Rgobon (2002). No Conagon, Only Inerdependence: Measurng Sock Marke Comovemens. Journal of Fnance, LVII (5), Forbes, Krsn J. and Menze D. Chnn (2004). A Decomposon of Global Lnkages n Fnacal Markes Over Tme. The Revew of Economcs and Sascs, 86(3), Frank, Nahanel and Heko Hesse (2009). Fnancal Spllovers o Emergng Markes Durng he Global Fnancal Crss. IMF Workng Paper no. 104, Inernaonal Moneary Fund. Hansen, Lars P. (1982). Large Sample Properes of Generalzed Mehod of Momens Esmaors. Economerca, 50,

25 Hernández, Leonardo F. and Rodrgo O. Valdés (2001). Wha Drves Conagon Trade, Neghborbood, or Fnancal Lnks? Inernaonal Revew of Fnancal Analyss, 10, Imbs, Jean (2004). Trade, Fnance, Specalzaon, and Synchronzaon. Revew of Economcs and Sascs, 86, Inernaonal Moneary Fund, (2007). Spllovers and Cycles n he Global Economy. World Economc Oulook, Aprl, Inernaonal Moneary Fund. Kng, Mervyn A. and Sushl Wadhwan (1990). Transmsson of Volaly beween Sock Markes. Revew of Fnancal Sudes, 3, Lee, Sang B. and Kwang J. Km (1993). Does he Ocober 1987 crash srenghen he comovemen among naonal sock markes? Revew of Fnancal Economcs, 3, Morona, Claudo and Andrea Belra (2008). Comovemens n Inernaonal Sock Markes. Journal of Inernaonal Fnancal Markes, Insuons and Money, 18, Sms, Chrsopher A. (1980). Macroeconomcs and Realy. Economerca, 48,

26 Fgure 1. Scaer plos of monhly naonal sock reurns for seleced counres and U.S. sock reurns by decade 24

27 Fgure 2. Responses of German sock reurns o a -1% srucural U.S. reurn shock Noe: 90% confdence bands were obaned by akng 5% and 95% percenles from 10,000 nonparamerc boosrap smulaons. 25

28 Table 1. Seleced nformaon on he role of sample counres n he world economy, 2008 (Percen of world oal) Sock marke capalzaon GDP (PPP bass) Expors Impors Ausrala Ausra Belgum Canada Denmark France Germany Hong Kong Ialy Japan Neherlands Norway Sngapore Span Sweden Swzerland Uned Kngdom Uned Saes Toal Noe: GDP, Expors and Impors are annual fgures; Sock marke capalzaon s he year-end fgure. Source: Bloomberg, World Economc Oulook, and Drecon of Trade Sascs. 26

29 Table 2. Trade lnkages of sample counres wh he U.S. by decade Toal rade wh U.S. (share of a counry s oal rade) Expors o U.S. (share of a counry's oal expors) Impors from U.S. (share of a counry's oal mpors) Ausrala Ausra Belgum na na na Canada Denmark France Germany Hong Kong Ialy Japan Neherlands Norway Sngapore Span Sweden Swzerland Uned Kngdom Average Noe: Toal rade s mpors plus expors. Source: Drecon of Trade Sascs, Inernaonal Moneary Fund. 27

30 Table 3. Allocaon of porfolo nvesmen for sample counres and he Uned Saes Porfolo nvesmen n U.S. (share of a counry s oal porfolo nvesmen abroad) Porfolo nvesmen of U.S. (share of a counry s oal foregn porfolo nvesmen) Ausrala Ausra Belgum Canada Denmark France Germany Hong Kong Ialy Japan Neherlands Norway Sngapore Span Sweden Swzerland Uned Kngdom Average Source: The Coordnaed Porfolo Invesmen Survey, Inernaonal Moneary Fund. 28

31 Table 4. Bvarae Ordnary Leas Squares esmaon resuls for each sample counry and he Uned Saes usng monhly sock reurns r = US α + β r + ε Counry Full 1970s 1980s 1990s 2000s Ausrala (0.062)* (0.156)* (0.155)* (0.111)* (0.071)* Ausra (0.062)* (0.084)* (0.144) (0.125)* (0.091)* Belgum (0.050)* (0.098)* (0.122)* (0.090)* (0.082)* Canada (0.038)* (0.083)* (0.072)* (0.078)* (0.066)* Denmark (0.052)* (0.126)* (0.113)* (0.103)* (0.074)* France (0.057)* (0.153)* (0.137)* (0.104)* (0.062)* Germany (0.051)* (0.109)* (0.119)* (0.095)* (0.067)* Hong Kong (0.094)* (0.285)* (0.217)* (0.180)* (0.082)* Ialy (0.071)* (0.174)* (0.158)* (0.161)* (0.076)* Japan (0.062)* (0.110)* (0.123)* (0.182)* (0.081)* Neherlands (0.042)* (0.093)* (0.083)* (0.078)* (0.072)* Sngapore (0.072)* (0.224)* (0.142)* (0.130)* (0.084)* Swzerland (0.044)* (0.105)* (0.098)* (0.097)* (0.057)* Uned Kngdom (0.049)* (0.162)* (0.103)* (0.083)* (0.046)* Noes: ) The sample perod s January 1973 o February ) The β esmaes are repored and sandard errors are n parenheses. ) Sandard errors are adjused usng he quadrac specral kernel wh auomac bandwdh selecon mehod. v) * ndcaes a 5% sgnfcance level. 29

32 Table 5. Generalzed Mehod of Momens esmaon resuls: Full me perod usng monhly sock reurns for each sample counry and he Uned Saes r US US US = α + β r +, = [ ] ε z r r pr r p Counry β (se) J(pv) GMM Ausrala (0.858)* (0.936) Ausra (0.871)* (0.542) Belgum (0.511)* (0.790) Canada (0.455)* (0.631) Denmark (0.422)* (0.391) France (0.583)* (0.692) Germany (0.419)* (0.293) Hong Kong (0.557)* (0.625) Ialy (0.422)* (0.243) Japan (0.634) (0.628) Neherlands (0.397)* (0.737) Sngapore (0.737)* (0.828) Swzerland (0.352)* (0.908) Uned Kngdom (0.588)* (0.765) Noes: ) The sample perod s January 1973 o February ) The β esmaes are obaned by he 5-sep erave Generalzed Mehod of Momens esmaor. ) The quadrac specral kernel wh auomac bandwdh selecon mehod s used o adjus sandard errors. v) The se of nsrumens ncludes 4 lags of naonal sock reurns and he U.S. sock reurns. v) J refers o he over-denfyng resrcons es sasc by Hansen (1982) and pv denoes assocaed p- values. v) * ndcaes a 5% sgnfcance level. 30

33 Table 6. Generalzed Mehod of Momens esmaon resuls: Sub-perods usng monhly sock reurns for each sample counry and he Uned Saes r US US US = α + β r +, = [ ] ε z r r pr r p 1970s 1980s Counry β GMM (se) J(pv) β GMM (se) J(pv) Ausrala (0.473) (0.029) (0.864) (0.802) Ausra (0.439) (0.947) (0.391) (0.195) Belgum (0.345)* (0.477) (1.120) (0.980) Canada (0.333)* (0.699) (0.252)* (0.557) Denmark (0.435) (0.450) (0.469) (0.534) France (0.716)* (0.715) (0.736) (0.654) Germany (0.456) (0.537) (0.582) (0.409) Hong Kong (1.283) (0.322) (0.781) (0.836) Ialy (0.929) (0.619) (0.482) (0.217) Japan (0.317) (0.688) (0.633) (0.346) Neherlands (0.328) (0.621) (0.425) (0.663) Sngapore (1.063) (0.856) (0.467)* (0.429) Swzerland (0.297) (0.417) (0.358)* (0.476) Uned Kngdom (0.858)* (0.839) (0.544) (0.852) 1990s 2000s Counry β GMM (se) J(pv) β GMM (se) J(pv) Ausrala (0.363)* (0.796) (0.231)* (0.112) Ausra (0.497) (0.488) (0.257)* (0.708) Belgum (0.410) (0.883) (0.194)* (0.426) Canada (0.279)* (0.410) (0.220)* (0.073) Denmark (0.457) (0.979) (0.268)* (0.431) France (0.363)* (0.343) (0.121)* (0.217) Germany (0.366)* (0.561) (0.124)* (0.362) Hong Kong (1.217)* (0.400) (0.231)* (0.706) Ialy (0.488) (0.165) (0.160)* (0.502) Japan (0.767) (0.459) (0.382)* (0.384) Neherlands (0.281)* (0.388) (0.179)* (0.302) Sngapore (0.410)* (0.517) (0.266)* (0.126) Swzerland (0.392) (0.709) (0.157)* (0.339) Uned Kngdom (0.290)* (0.980) (0.149)* (0.085) Noes: ) The sample perod s January 1973 o February ) The β esmaes are obaned by he 5-sep erave Generalzed Mehod of Momens esmaor. ) The quadrac specral kernel wh auomac bandwdh selecon mehod s used o adjus sandard errors. v) The se of nsrumens ncludes 4 lags of naonal sock reurns and U.S. sock reurns. v) J refers o he over-denfyng resrcons es sasc by Hansen (1982) and pv denoes assocaed p-values. v) * ndcaes a 5% sgnfcance level. 31

34 Table 7. Naonal sock reurn responses o a 1% U.S. sock reurn shock: monhly reurns y y = D( L) ε = D( L) Cu US US US = [ r ], = [ ], = [ ] r ε ε ε u u u Eu u = I, Eε ε = = CC 1970s 1980s Counry ψ S 90% C.I. ψ L 90% C.I. ψ S 90% C.I. ψ L 90% C.I. Ausrala [0.578,1.175] [ 0.379,2.079] [ 0.306,1.382] [ 0.385,1.852] Ausra [0.117,0.429] [-0.330,0.549] [-0.058,0.442] [-0.183,2.104] Belgum [0.466,0.813] [-0.145,0.984] [ 0.205,0.705] [-0.496,0.893] Canada [0.561,0.841] [ 0.369,1.320] [ 0.780,1.048] [ 0.599,1.481] Denmark [0.170,0.752] [-0.305,1.241] [ 0.384,0.813] [-0.182,1.073] France [0.523,1.106] [ 0.030,1.847] [ 0.479,0.843] [ 0.206,1.816] Germany [0.208,0.659] [-0.193,0.798] [ 0.194,0.712] [-0.149,1.327] Hong Kong [0.741,1.407] [ 1.479,3.792] [-0.027,1.530] [-0.126,1.708] Ialy [0.270,0.749] [-0.231,0.966] [ 0.086,0.588] [ 0.008,2.018] Japan [0.104,0.603] [-0.104,1.216] [ 0.070,0.575] [ 0.275,1.383] Neherlands [0.491,1.027] [ 0.277,1.407] [ 0.493,0.780] [ 0.329,1.110] Sngapore [0.954,1.795] [ 0.865,3.199] [ 0.496,1.346] [ 0.350,1.891] Swzerland [0.366,0.810] [ 0.127,1.236] [ 0.314,0.683] [ 0.005,1.230] Uned Kngdom [0.639,1.278] [ 0.573,2.821] 0.78 [ 0.541,0.932] [ 0.334,1.220] 1990s 2000s Counry ψ S 90% C.I. ψ L 90% C.I. ψ S 90% C.I. ψ L 90% C.I. Ausrala [0.553,0.925] [ 0.305,0.969] [0.853,1.173] [0.921,2.539] Ausra [0.208,0.805] [ 0.199,0.844] [0.675,1.149] [0.754,3.219] Belgum [0.397,0.758] [-0.034,0.802] [0.763,1.203] [0.939,3.124] Canada [0.761,1.160] [ 0.546,1.158] [0.909,1.180] [1.010,2.727] Denmark [0.320,0.683] [ 0.004,0.779] [0.808,1.145] [1.067,2.878] France [0.514,0.878] [ 0.284,0.895] [0.981,1.231] [1.131,2.769] Germany [0.473,0.863] [ 0.149,0.823] [1.074,1.355] [1.195,2.828] Hong Kong [0.896,1.446] [-0.255,1.113] [0.645,1.030] [0.818,2.452] Ialy [0.543,1.106] [ 0.420,1.607] [0.860,1.152] [1.030,2.926] Japan [0.392,1.012] [-0.799,0.677] [0.374,0.701] [0.719,2.266] Neherlands [0.542,0.791] [ 0.281,0.716] [0.991,1.385] [1.200,3.188] Sngapore [0.858,1.379] [-0.419,1.182] [0.791,1.137] [1.077,2.970] Swzerland [0.512,0.949] [ 0.190,0.860] [0.644,0.876] [0.849,1.822] Uned Kngdom [0.595,0.832] [ 0.323,0.769] [0.804,1.001] [0.981,2.581] Noes: ) Observaons span from January 1973 o February ) The response funcons are obaned from he bvarae srucural vecor auoregressve (SVAR) esmaons wh an denfyng assumpon ha he naonal sock reurn shocks do no conemporaneously affec U.S. sock reurns. ) The number of lags was se a 4 by he Akake Informaon Crera. v) ψ denoes conemporaneous responses of he naonal sock reurns o a 1% U.S. sock reurn shock, measured by he Cholesk decomposon facor (C ). v) ψ denoes long-run responses of he naonal sock reurns o a 1% U.S. sock reurn shock, measured by D ( 1) C. v) L The 90% confdence nervals (C.I.) were obaned by akng 5% and 95% percenles from 10,000 nonparamerc boosrap smulaons for each counry. S 32

35 Table 8. Esmaon resuls: emergng U.S. crss epsode r US US US = α + β r + ε, z = [ r ] r r r p p Pre-Epsode Pos-Epsode Counry β GMM (se) J(pv) β GMM (se) J(pv) Ausrala (0.461) (0.540) (0.228)* (0.591) Ausra (0.299) (0.016) (0.432) (0.640) Belgum (0.305)* (0.259) (0.231)* (0.072) Canada (0.245)* (0.355) (0.188)* (0.403) Denmark (0.248) (0.519) (0.256)* (0.432) France (0.148)* (0.278) (0.225)* (0.203) Germany (0.220)* (0.406) (0.211)* (0.309) Hong Kong (0.507) (0.234) (0.271) (0.753) Ialy (0.239)* (0.590) (0.200)* (0.163) Japan (0.385) (0.049) (0.410)* (0.770) Neherlands (0.245) (0.305) (0.229)* (0.139) Norway (0.503) (0.337) (0.395)* (0.276) Sngapore (0.508) (0.417) (0.381) (0.666) Span (0.228)* (0.443) (0.221)* (0.269) Sweden (0.435) (0.803) (0.180)* (0.313) Swzerland (0.308) (0.099) (0.205)* (0.489) Uned Kngdom (0.217) (0.441) (0.227)* (0.473) Noes: ) The sample perods of pre- and pos-epsode are he frs week of 2000 o he las week of July 2007 and he frs week of Augus 2007 o he las week of February 2009, respecvely. ) Sandard errors (se) are adjused by he quadrac specral kernel wh auomac bandwdh selecon mehod. ) The se of nsrumens ncludes 4 lags of naonal sock reurns and U.S. sock reurns. v) J refers o he over-denfyng resrcons es sasc by Hansen (1982) and pv denoes assocaed p-values. Bold ndcaes he 5% sgnfcance level. v) * ndcaes a 5% sgnfcance level. 33