Media Briefings


  • Published Date: March 2009

The big industrialised economies are pulling each other down at an unprecedented rate, according to new research that measures how much changes in industrial production are due to business cycle ‘spillovers’ from other countries.

The study uses a new technique first developed by Professors Francis X. Diebold and Kamil Yilmaz for measuring interdependence between global stock markets, and published in the January 2009 issue of the Economic Journal.

The Diebold-Yilmaz volatility spillover index captures how fast the investor fears build up and spread across markets during times of major financial crises (The index is updated on a weekly basis and posted at:

The new study applies the Diebold-Yilmaz analysis of stock return and volatility spillovers across global stock markets to the seasonally adjusted industrial production indices for six industrialised countries: France, Germany, Italy, Japan, the UK and the United States.

The spillover index framework makes it possible to identify how much ‘shocks’ (significant changes up or down) to industrial production in each country affect industrial production in the other countries over time.

Analysing data going back to 1958, the research finds that the behaviour of the index during the current recession is in stark contrast with its behaviour in past recessions. It has increased close to 40 points in a matter of four months, September to December.

In contrast, during the worst global recession of the post-war era following the first oil price shocks, the spillover index recorded a smaller increase, from a low of 30 to a high of 64, in a matter of four years, from 1972 to 1976.

The unprecedented jump in the index between September and December 2008 is an indication of the extent to which countries are pulling each other down.

The research also reports the directional spillovers across G-6 countries. It is clear that the United States is leading the way in the current recession. In other words, the shocks first take place in the United States and spread to the other countries.

Figure 1’s spillover plot as of December 2008 shows how different is the current global recession from past recessions. Since the collapse of Lehman Brothers, in a matter of four months, all major industrialised economies of the world are pulling each other down, with the United States playing a special role.

Kamil Yilmaz comments:

‘There is a desperate need for coordinated policy action to stop the free fall in industrial output around the world. G-20 countries should agree to increase the size of fiscal stimulus packages and coordinate the way these policies are implemented.

‘Obviously, these policies cannot be expected to have full impact unless the US government comes up with a feasible plan to clean up the balance sheets of its banks from toxic assets.’


Notes for editors: ‘Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets’ by Francis Diebold and Kamil Yilmaz is published in the January 2009 issue of the Economic Journal.

The more recent paper is ‘International Business Cycle Spillovers’ by Kamil Yilmaz.
It is available at:

Diebold is at the University of Pennsylvania. Yilmaz is at Koc University in Turkey.

An interview with the authors is available on Vox:

For further information: contact Kamil Yilmaz on +90-212 338 1458 (email:; or Romesh Vaitilingam on 07768 661095 (email: