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WORKING PAPER SERIES

NO

1548 / MAY 2013LARGE GLOBAL VOLATILITY SHOCKS,

EQUITY MARKET

S AND GLOBALISATION

1885-2011

Arnaud Mehl

In 2013 all ECB publications feature a motif taken from the €5 banknote.NOTE: This Working Paper should not be reported

as representing the views of the European Central

Bank (ECB). The views expressed are those of the

© European Central Bank, 2013

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ISSN

1725-2806 (online)

EU Catalogue No

QB-AR-13-045-EN-N (online)

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Acknowledgements

The author is grateful to Geert Bekaert, Michael Ehrmann and Marcel Fratzscher for comments as well as to Matthieu Bussière, Marco

Lo Duca, Marie Hoerova, Martin Scheicher and Livio Stracca for helpful discussions. The views expressed in this paper are those of

Arnaud Mehl

European Central Bank; e-mail: arnaud.mehl@ecb.europa.eu

Abstract:

JEL No

Keywo rds

Non-technical summary

I. Introduction

II. Identification of large global

stock market volatility shocks

III. Empirical framework

Simple factor model

t D D t

Decomposition model

t D

1IJi,

Zg

Instruments

Z Z Data

IV. Results

Stylised facts

Simple factor model estimates

Decomposition model estimates

Z V.

Conclusions

References

Table 1: Overview of large global stock market volatility shocks

Table 2: Simple factor model estimates

Table 3: Decomposition model estimates (constant gamma loading) Table 4: Decomposition model estimates (full model) Figure 1: Two largest global stock market volatility shocks and globalisation (Stock market crash of 1929 vs. Lehman Brs. collapse) -25 -20 -15 -10 -5 0

Average equity return ex. US, %

October 1929October 2008

0 20 40
60
80

Average openness ex. US, % of GDP

October 1929October 2008

Figure 2: 130 years of large global stock market volatility shocks

Oct. 1929 crash

Lehman Brs.

New Deal

Oct 1987 crash

Panic of 1907World war II

9/11

JFK assassination

Sovereign crisesUS-Spanish war

1st oil shockWorld War I

SputnikKorean war

-2 0 2 4 6

8# of standard deviations away from trend

190019201940196019802000

Detrended volatilityShock (1st month)

Figure 3: Histogram of the large global stock market volatility shocks (full sample)

Average = 2.9

0 .05 .1 .15 .2 .25Fraction

2468Shocks (in # st. dev. terms)

1 st. dev. = 6.5% equity (S&P 500) price change

Distribution of shocks

Figure 4: Large global stock market volatility shocks vs. excess equity returns (16 countries; 1885-2011) Black Monday (1987)Lehman Brs. (2008)Black Monday (1929) -80 -60 -40 -20 0 20 40
60

Excess equity return in USD terms, % per month

2468Shocks (in # st. dev. terms)

Obs.Simple OLS line

Figure 5: Simple factor model - Global beta estimates 1.1 1.15 1.2 1.25

1.3Average across 17 countries

190019201940196019802000

0 .05 .1 .15 .2Standard deviation across 17 countries

190019201940196019802000

Time-varying beta w.t. global factor

Figure 6: Simple factor model - Regional beta estimates .2 .3 .4 .5 .6Average across 17 countries

190019201940196019802000

.2 .25 .3 .35 .4Standard deviation across 17 countries

190019201940196019802000

Time-varying beta w.t. regional factor

Figure 7: Simple factor model - Actual vs. fitted returns -60 -40 -20 0 20 40
60

Fitted returns

-30-20-1001020Actual returns

Obs.Simple OLS line

Figure 8: Decomposition model with a constant gamma loading (Breakdown of gamma estimates by shock type and period)

Economic shocksNon-economic shocks

Full samplePre-1945 Post-1945Full samplePre-1945 Post-1945 -1.5 -1 -.5 0 Figure 9: Decomposition model with a constant gamma loading (Breakdown of ga mma estimates by shock origin and period)

US shocksOutside US shocks

Full samplePre-1945 Post-1945Full samplePre-1945 Post-1945 -1.5 -1 -.5 0 Figure 10: (Full) Decomposition model - Gamma loading estimates

1st wave globalizationDeglobalization

Re-globalization

-1.3 -1.2 -1.1 -1 -.9Average across 17 countries

190019201940196019802000

.1 .2 .3 .4 .5 .6Standard deviation across 17 countries

190019201940196019802000

Time-varying gamma

Figure 12: Intensity of shock transmission vs. globalisation (Pre-1945) Figure 13: Intensity of shock transmission vs. globalisation (Post-1945)

Table A1: Factor orthogonalisation estimates

Selected examples of press articles of events reported to be at the origin of large global stock market volatility shocks 23

March 1898:

Spanish

-American War

1901: Panic of 1901

1917: Russian Revolution

1929:

Black Thursday

1933:

President Roosevelt's inauguration and New Deal

1938:

Anschluss of Austria by Germany

1941:

Pearl Harbour

1950:Korean War

1957:

Sputnik

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