56 Pages Posted: 3 Jun 2011 Last revised: 26 Jul 2012
Date Written: 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.
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
Suggested Citation: Suggested Citation
Bekaert, Geert and Ehrmann , Michael and Fratzscher, Marcel and Mehl, Arnaud, Global Crises and Equity Market Contagion (May 31, 2012). Available at SSRN: https://ssrn.com/abstract=1856881 or http://dx.doi.org/10.2139/ssrn.1856881
By Meb Faber