Market risks that change US-European equity correlations

We study the options-implied market risks that affect US-European stock-return correlations during 2007-2021. We discover that U.S. stock-and bond-market uncertainty, stock-market tail risk, European equity-market risk, and global credit risk are dominant contributors to changing US-European stock correlations during the GFC period. However, these market risks collectively contribute less to correlations in the post-GFC period. Further, correlations rise in times of rising U.S. stock and bond market risks. Rising equity tail risk and global credit risk raise correlations in the GFC period but lower them in the post-GFC period. Also, European stock-market uncertainty exerts a negative influence on stock correlations. Our results disentangle the risks of U.S. and European stock and bond markets that change the cross-market diversification benefits.