Global Crises and Equity Market Contagion

48 Pages Posted: 13 Sep 2011

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Arnaud Mehl

European Central Bank (ECB)

Multiple version iconThere are 6 versions of this paper

Date Written: September 2, 2011

Abstract

Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and 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. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, 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

Bekaert, Geert and Ehrmann, Michael and Fratzscher, Marcel and Mehl, Arnaud, Global Crises and Equity Market Contagion (September 2, 2011). ECB Working Paper No. 1381. Available at SSRN: https://ssrn.com/abstract=1921248

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Michael Ehrmann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Marcel Fratzscher

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Arnaud Mehl

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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