Global Crises and Equity Market Contagion
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
European Central Bank (ECB); Bank of Canada
DIW Berlin; Centre for Economic Policy Research (CEPR)
European Central Bank (ECB)
May 31, 2012
Using the 2007-09 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. We find statistically significant evidence of contagion from US markets and from the global financial sector, but the effects are economically small. By contrast, there has been substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. This confirms the old “wake-up call” hypothesis, with markets and investors focusing substantially more on country-specific characteristics during the crisis.
Number of Pages in PDF File: 56
Keywords: contagion; financial crisis; equity markets; global transmission; market integration; country risk; factor model; financial policies; FX reserves, current account
JEL Classification: F3, G14, G15
Date posted: June 3, 2011 ; Last revised: July 26, 2012
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