When the US sneezes the world catches cold: are worldwide stock markets stable?
There is a widespread belief that the US subprime mortgage crisis has escalated into a full-blown current global financial crisis and that many economies throughout the world have been hit by it. Using a test of financial market stability, this article shows the varying degree of impact system-wide shocks during the US subprime crisis had on developed and emerging market stock indices. There is evidence that some developed and stable markets display signs of financial fragility with systematic shocks being propagated differently during extreme and normal market conditions. In addition, the crisis increases the response of emerging market returns to systematic shocks during both tranquil and volatile regimes, albeit that the effects are more pronounced in Latin America than in Asian markets.
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