Structure of interdependencies among international stock markets and contagion patterns of 2008 global financial crisis

In this study, we apply directed acyclic graphs and search algorithm designed for timeseries with non-Gaussian distribution to obtain causal structure of innovations from an errorcorrection model. The structure of interdependencies among six international stock markets isinvestigated. The results provide positive empirical evidence that there exist long-runequilibrium and contemporaneous causal structure among these stock markets.DAG analysis results show that Hong Kong is influenced by all other open markets incontemporaneous time, whereas Shanghai is not influenced by any of the other markets incontemporaneous time. Historical decompositions indicate that New York and Shanghai stockmarkets are highly exogenous and Germany and Hong Kong are the least exogenous markets.Further, we find that New York is the most influential stock market with consistent impact onprice movements.One implication is that diversification between US and Germany may not provide desiredimmunity from financial crisis contagion as much as it does diversification between US andShanghai.