The Financial Crisis and its Impact on Comovements of Financial Markets: Evidence from Exchange-Traded Funds

The two-fold objective of this paper is, on one hand, to study the comovements of international financial markets before and after the “subprime” financial crisis and, on the other hand, to determine their impact on international diversification, using substitutes for investable country indices, that is, exchange-traded funds. These new instruments are highly prized by investors. Three main categories of comovements are analyzed: short-term comovements as studied by contagion and dynamic conditional correlations; long-term comovements as studied by cointegration; and, finally comovements induced by the transmission of extreme values. In studying these comovements between the American market and 21 other developed and emerging markets, our results suggest that, after the financial crisis, the interdependencies and transmission of extreme values between the American market and the other markets studied increased significantly in the short term and, thus, reduced the advantages of international diversification in the short term. However, our analyses of contagion and cointegration suggest that the benefits of international diversification persist over the long term, even in times of crisis.