International stock market co-movements following US financial globalization

In this paper, I propose a novel hypothesis to examine whether financial globalization was the economic cause of cross-market co-movement and crisis propagation before and after the global financial crisis; this has been an unsolved puzzle until today. The hypothesis suggests that it is the global outreach of the crisis-originating country, rather than the global outreach of the crisis-infected countries, that caused cross-country co-movement and crisis spread of 2008 crisis. Using data on 59 countries from 2003 to 2013, I present evidence consistent with the blast propagation hypothesis and find that foreign direct investment and foreign portfolio investment were two important channels for cross-market co-movement and global propagation of the crisis before and after crisis. These findings can help governments create international coordination programs to limit crisis propagation in the future.