University of Arkansas, Fayetteville
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Abstract

This paper studies the effect of various historical events on the market correlation among the three largest financial centers of the world: New York City, London, and Tokyo for the time period 1983-2003. The analysis focuses on those correlations associated with four historical events: the U.S. stock market crash of 1987, the London IRA Bombing of 1990, the Asian Currency Crisis of 1997 (particularly the day the Thai Baht fell), and the September 11th, 2001 terrorist attacks of 2001. The purpose of this study was to provide additional information that will provide the investment community with insights about maintaining market stability during periods of economic crises. With this information, investors may be able to avoid large losses and hedge their systemic risk of global events. Market data associated with each historical event were analyzed using correlational and statistical procedures. Results suggest that, during times of economic crises, the S&P 500 and the FTSE 100 tend to be more correlated with each other than with the Nikkei 225. At the end of the tested time period, the September 11th terrorist attack shows a similar correlation among the markets although the degree of correlation is slightly less. However, the fact that their correlations are very similar shows that there have not been significant changes in market correlation during economic crises over time.

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