The 2007–08 financial crisis was one of historic dimensions—few would dispute that it was one of the broadest, deepest, and most complex crises since the Great Depression. Initially, however, the crisis seemed to be of rather limited scope, and many thought countries would be able to “decouple” from events in the United States. But after Lehman Brothers collapsed in September 2008, the crisis spread rapidly across institutions, markets, and borders. There were massive failures of financial institutions and a staggering collapse in asset values in developed and developing countries alike. Nonetheless, the reactions of stock markets varied widely around the globe, with some countries showing greater comovement with the US market than others (figure 1).
Together with Tatiana Didier, we empirically investigate the factors that determine comovement between stock market returns in the United States and those in 83 other countries in a recent paper. In particular, we evaluate the extent to which comovement with US stock market returns during this recent turbulent period was driven by real linkages, was driven by financial linkages, or was the consequence of “demonstration effects” (see Goldstein 1998 and Masson 1998), in which investors became aware of vulnerabilities present in the US context and reassessed the risks in other countries, reevaluating the value of their stockholdings.