A COMPARATIVE ANALYSIS OF RESPONSE OF INTERNATIONAL CAPITAL MARKETS TO POLITICAL UPHEAVAL

One explanation for the apparent excessive volatility of stock prices, not justified by fundamentals, could be that prices sometimes react in anticipation of shocks which do not actually materialize. The most dramatic examples of such shocks are fleeting political upheavals such as the abortive coup of August 1991 in the Soviet Union. Our analysis of the responses of several stock markets to this coup suggests that price fluctuations induced by fleeting political events can partially explain the excessive volatility of stock markets. Our finding of major differences in adjustment processes between different stock markets has implications for international capital market integration.