Forecasting Stock Returns in the Japanese, UK and US Markets During the Crash of October 1987

The observation that different national stock markets are interrelated to different degrees is well established in the literature on global market integration. This literature documents that different national markets display more or less sensitivity to movements in other national equity markets, depending on various factors such as: their geographic proximity, their trade relationships, their relative importance to world economic activity, and the time period under scrutiny. While equity values in a few major markets, such as Japan, the UK and the US, tend to lead global price movements, the nature of these intermarket relationships appears to vary at different points in time. Roll (1989), for example, documents that October 1987 is the only month in recent experience during which all markets moved in the same direction. This result suggests that intermarket price relationships differ in periods of normal market activity from those in periods of extreme price moves, such as October 1987.