Faculty Scholarship 1994 - Present

Co-Movement of U.S., Japanese, and European Equity Markets Before and After September 11, 2001: Global Portfolio Diversification Implications

Empirical studies show that correlation between national stock markets tend to increase and the benefits of global portfolio diversification tend to decrease after events of global importance. A sufficiently long time period has passed since the September 11, 2001 terrorist attacks in the U.S. It provides a valuable opportunity to study if these events have changed the long-term co-movement patterns of the world�s national stock markets. We test this hypothesis with a maximum likelihood test and with the correlation analysis and principal components analysis techniques by comparing the co-movement patterns of the U.S., Japanese, and twenty-one European stock markets during the five-year period before September 11 and during the five-year period after September 11. Our findings show that correlation between the twenty-three stock markets increased substantially and the benefits of global diversification with these stock markets decreased considerably after September 11. The maximum likelihood test results, the term correlation coefficients, and the principal components analysis results indicate that the co-movement patterns of the markets changed significantly after September 11.