Abstract: Since the 2008 financial crisis, the correlation coefficients between international stock markets have fluctuated greatly. The fundamental factors which proposed in previous studies cannot fully explain these fluctuations. In this paper, a new mechanism that affects stock market co-movement is proposed, which name is ripple effect. The ripple effect refers to the phenomenon that an increase (decrease) in central market's idiosyncratic volatility (IVOL) will lead to an increase (decrease) in return correlation coefficient (CORR) between other markets.
Co-movement model is used to analyze the ripple effect. The model shows that when market Y and market Z depend on market X and the dependence coefficient is positive, the CORR of return between Y and Z is positively correlated with the market X's IVOL, negatively correlated with Y and Z's IVOL. The IVOL and the CORR between 9 major markets are used in empirical analysis. Three regressions need to be done to test the US market's ripple effect. First, regress the US market and other markets' CORR on their IVOL to determine the direction of information transmission between US and other markets. Second, regress the CORR between other markets on the US market's IVOL to calculate the influence of the US market on the co-movement among other markets. Finally, regress the CORR between US and other markets on another market's IVOL to identify that other markets have no influence on the US stock markets. The results show that there is no obvious ripple effect before 2007, and there is a ripple effect centered on the US market after 2007. At the same time, the ripple effect of other markets is also examined. The results show that there is no significant ripple effect in any market except the US. In recent years, A-shares market began to be affected by US market, which is the main reason for the increasing in the CORR between A-shares and other stock markets. The direction of risk transmission in the international market can be identified by studying the relationship between IVOL and CORR. Previous researches may overestimate the influence of European market.
This paper enriches the research on the factors that affect stock market co-movement, and ripple effect is of great significance for understanding the market co-movement and assessing market influence.

Key words: stock market co-movement, market volatility, ripple effect, risk contagion