The Effects Of Market Integration On Global Risk Sharing: Examining Market Reactions To Cataclysmic Events

Abstract

There are a number of cataclysmic events that stand out as markedly catastrophic enough to cause significant unrest in investors' outlook on the stability of the market. In today's increasingly integrated global market, the key concern for investors in adjusting for such situations is to spread their portfolio risk across different risk bases in order to reduce unwanted effects from the idiosyncrasy of a particular part of their portfolios. Using the event study method and ICAPM-derived measure of market integration, I find that there is evidence for market integration's global risk sharing effect on abnormal returns from cataclysmic events, specifically in regard to natural disasters and terrorist attacks. There is, however, no evidence of risk-diffusing effects beyond the event day, even for relatively short post-event windows of 6 and 11 days. This seems to suggest that market integration as motivated by global risk sharing is only effective to disperse the initial shock of a cataclysmic event.