diff --git a/lib/bundle.js b/lib/bundle.js
index d5578bf1..179d7d7a 100644
--- a/lib/bundle.js
+++ b/lib/bundle.js
@@ -95,7 +95,7 @@ function crawl (parent, key, path, pathFromRoot, indirections, inventory, $refs,
  */
 function inventory$Ref ($refParent, $refKey, path, pathFromRoot, indirections, inventory, $refs, options) {
   let $ref = $refKey === null ? $refParent : $refParent[$refKey];
-  let $refPath = url.resolve(path, $ref.$ref);
+  let $refPath = url.resolve(pathFromRoot, $ref.$ref);
   let pointer = $refs._resolve($refPath, pathFromRoot, options);
   if (pointer === null) {
     return;
diff --git a/lib/resolve-external.js b/lib/resolve-external.js
index c7238fbd..01f1ccd6 100644
--- a/lib/resolve-external.js
+++ b/lib/resolve-external.js
@@ -44,6 +44,7 @@ function resolveExternal (parser, options) {
  * @param {string} path - The full path of `obj`, possibly with a JSON Pointer in the hash
  * @param {$Refs} $refs
  * @param {$RefParserOptions} options
+ * @param {boolean} external - Whether `obj` was found in an external document.
  *
  * @returns {Promise[]}
  * Returns an array of promises. There will be one promise for each JSON reference in `obj`.
@@ -51,7 +52,7 @@ function resolveExternal (parser, options) {
  * If any of the JSON references point to files that contain additional JSON references,
  * then the corresponding promise will internally reference an array of promises.
  */
-function crawl (obj, path, $refs, options) {
+function crawl (obj, path, $refs, options, external) {
   let promises = [];
 
   if (obj && typeof obj === "object" && !ArrayBuffer.isView(obj)) {
@@ -59,16 +60,17 @@ function crawl (obj, path, $refs, options) {
       promises.push(resolve$Ref(obj, path, $refs, options));
     }
     else {
+      if (external && $Ref.is$Ref(obj)) {
+        /* Correct the reference in the external document so we can resolve it */
+        const withoutHash = url.stripHash(path);
+        obj.$ref = withoutHash + obj.$ref;
+      }
+
       for (let key of Object.keys(obj)) {
         let keyPath = Pointer.join(path, key);
         let value = obj[key];
 
-        if ($Ref.isExternal$Ref(value)) {
-          promises.push(resolve$Ref(value, keyPath, $refs, options));
-        }
-        else {
-          promises = promises.concat(crawl(value, keyPath, $refs, options));
-        }
+        promises = promises.concat(crawl(value, keyPath, $refs, options, external));
       }
     }
   }
@@ -94,6 +96,12 @@ async function resolve$Ref ($ref, path, $refs, options) {
   let resolvedPath = url.resolve(path, $ref.$ref);
   let withoutHash = url.stripHash(resolvedPath);
 
+  /* Correct the $ref to use a path relative to the root, so that $Refs._resolve can resolve it,
+     otherwise transitive relative external references will be incorrect if the second external
+     relative ref doesn't work relative to the root document.
+   */
+  $ref.$ref = url.relative($refs._root$Ref.path, resolvedPath);
+
   // Do we already have this $ref?
   $ref = $refs._$refs[withoutHash];
   if ($ref) {
@@ -107,7 +115,7 @@ async function resolve$Ref ($ref, path, $refs, options) {
 
     // Crawl the parsed value
     // console.log('Resolving $ref pointers in %s', withoutHash);
-    let promises = crawl(result, withoutHash + "#", $refs, options);
+    let promises = crawl(result, withoutHash + "#", $refs, options, true);
 
     return Promise.all(promises);
   }
diff --git a/lib/util/url.js b/lib/util/url.js
index 81b3a0d7..5e0a62a6 100644
--- a/lib/util/url.js
+++ b/lib/util/url.js
@@ -1,5 +1,7 @@
 "use strict";
 
+const pathModule = require("path");
+
 let isWindows = /^win/.test(process.platform),
     forwardSlashPattern = /\//g,
     protocolPattern = /^(\w{2,}):\/\//i,
@@ -269,3 +271,22 @@ exports.safePointerToPath = function safePointerToPath (pointer) {
         .replace(jsonPointerTilde, "~");
     });
 };
+
+/**
+ * Like path.relative(from, to) but for URLs. It will return a relative
+ * URL if it can, otherwise an absolute URL is returned.
+ * @param {string} from
+ * @param {string} to
+ * @returns {string}
+ */
+exports.relative = function relative (from, to) {
+  if (!exports.isFileSystemPath(from) || !exports.isFileSystemPath(to)) {
+    return exports.resolve(from, to);
+  }
+
+  const fromDir = pathModule.dirname(exports.stripHash(from));
+  const toPath = exports.stripHash(to);
+
+  const result = pathModule.relative(fromDir, toPath);
+  return result + exports.getHash(to);
+};