Crises in Developed and Emerging Stock Markets

Stock market crises in the developed markets differ in important ways from the crises in emerging stock markets. Our study of nine crises in the 1970–97 period indicates that developed market crises have become less severe over time, in terms of both the extent of price decline and duration, but those in emerging stock markets have not. In both markets, prices fall for at least three years subsequent to recovery from a crisis and the crisis in one market is likely to be followed by crises in most other markets in the region. Nevertheless, even in times of crises, international stocks continue to provide diversification benefits for U.S. investors with long investment horizons.