Revisiting stock market index correlations

Comovement of stock market indices increases during crashes, and does not come down when the turmoil settles down. This paper explains upgrade of comovements during turmoil periods with theories from Bayesian learning and dynamical systems involving synchronization. Our main conclusion is that the correlation does not go down because it is learned during the turmoil. This learned level of correlation has high precision, so there is little doubt that it is at a higher level because of a numerical discrepancy. The belief that market movements are loyal to each other turns into a self-fulfilling prophecy. Traders follow other markets closely before making trading decisions. So the belief that interdependence between markets are high during the crash turns into reality by correlated actions of traders in different markets avoiding correlation to fall to its previous level after the crash