Linkages in global financial market during financial crises: a comparison of the periods 1995-2000 and 2007-2009

The aim of the paper is to describe and compare the dynamics of linkages between stock markets during financial crises. We investigate similarities and differences between the patterns of changes in the conditional dependence structure during the 1997 Asian and 1998 Russian financial crises, and the crisis of 2007-2009. The question we try to answer is how the location of the starting point influences the way and the dynamics of the crisis expansion. The basic tool for our analysis is a Markov regime-switching copula model applied to pairs of the daily returns on chosen representative stock indices. The model enables us to distinguish regimes without extreme dependence, and ones with tail dependence which can be of asymmetric type. Our main findings are that the increase in the strength of lower tail dependence is the most significant indicator of the crisis.