Transmission of Volatility between Stock Markets

Abstract
This article investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. We construct a model in which 'contagion' between markets occurs as a result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a 'mistake' in one market can be transmitted to other markets. We offer supporting evidence for contagion effects using two different sources of data.