Market interdependence before, during, and after the 2007 US subprime crisis: evidence from index futures markets

This study investigates the market interdependence among the Dow Jones (USA), Nikkei225 (Japan), and KOSPI200 (Korea) index futures markets from May 2002 to July 2009, which is divided into three distinct periods: the normal growth, accelerated growth and declining growth (crisis) periods. We document that the Dow Jones futures market has considerable influence on KOSPI200 and Nikkei225 futures markets during the normal growth period but has relatively little influence on the two markets during the crisis period. Although a number of previous studies have indicated that the market interdependence tended to become more severe after the historical financial crises, we find such a linkage during the normal growth period (i.e., before the recent US subprime crisis), not after the crisis. This discrepancy results in differential opportunities for risk diversification, which is also supported by the evidences from the impulse response analysis.