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Rev Fin 1990; 3:5-33
© 1990 the Society for Financial Studies

Article

Transmission of volatility between stock markets

MA King and S Wadhwani
London School of Economics, Houghton Street, London, WC2A 2AE, UK

Abstract

This article investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. We construct a model in which 'contagion' between markets occurs as a result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a 'mistake' in one market can be transmitted to other markets. We offer supporting evidence for contagion effects using two different sources of data.


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