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This paper investigates the nature of shocks across international equity markets and evaluates the shifts in their comovements at a business-cycle frequency. Using an “identification through heteroskedasticity” methodology, we compute the impact coefficients on the common and country-specific shocks to stock returns. We then establish three key results regarding the recent comovement amongst returns. First, across all indices, persistent high-volatility spells always coincide with macroeconomic slowdowns. This confirms that market volatility increases as a result of shifts in the perception of macroeconomic risk. Second, there is a rise in the observed responses of international stock returns to common shocks during turbulent periods; such increase is largely attributable to bigger shocks (heteroskedasticity of fundamentals) rather than to breaks in the transmission mechanism or increased structural interdependence between markets. This holds for the Great Financial Crisis too. Third, since the late 1990s returns have been hit more often by high-volatility common shocks, likely because of larger and more persistent macroeconomic disturbances.

International Equity Markets Interdependence: Bigger Shocks or Contagion in the 21st Century?