Financial markets in times of stress

In this paper, we examine which markets are most synchronized internationally and exhibit the greater extent of co-movement. We focus on daily data for four asset markets: bonds, equities, foreign exchange, and domestic money market. Our sample covers 35 developed and emerging market countries during 1997-1999. The extent of co-movement and responsiveness to external shocks is examined in different ways. To measure the response of these markets to adverse external shocks, we date the peaks in domestic interest rates and bond spreads and the largest daily declines in equity prices and assess the extent of clustering around the same period. We also analyze which markets show evidence of greatest co-movement, in general, irrespective of whether there are adverse shocks or not. (C) 2002 Elsevier Science B.V. All rights reserved.