Contagion and impulse response of international stock markets around the 9-11 terrorist attacks

This study investigates both return and volatility contagion effects of the 9-11 terrorist attacks across the major markets, and examines the extent to which international stock markets can be destabilized by shocks that arise in the US. Evidence presented in this paper suggests that to the extent that higher correlations with the US market can enhance contagion effects from the US, the attacks brought about volatility contagion (rather than return contagion) from the US to UK and German markets. In contrast, the Japanese market had return contagion (rather than volatility contagion) from the US market. After the attacks, a US shock had a strongly positive effect on the US/Japan return correlation but had little or no effect in response functions of the return correlation for the US/UK and US/German markets. Impulse responses of the volatility correlation to a US shock notably increased after the attacks for the US/UK and US/German markets. An overall analysis of the post-attack period reveals that international market correlations were strengthened through volatility for the US/UK and US/German markets and through return for the US/Japanese market.