The Global Crisis and Equity Market Contagion

64 Pages Posted: 30 Jan 2014 Last revised: 15 Sep 2014

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)

Date Written: January 1, 2014

Abstract

We analyze the transmission of the financial crisis of 2007 to 2009 to 415 country-industry equity portfolios. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the U.S. and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries' economic fundamentals. This confirms the "wake-up call" hypothesis, with markets focusing 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

Bekaert, Geert and Ehrmann, Michael and Fratzscher, Marcel and Mehl, Arnaud, The Global Crisis and Equity Market Contagion (January 1, 2014). DIW Berlin Discussion Paper No. 1352; Columbia Business School Research Paper No. 14-26. Available at SSRN: https://ssrn.com/abstract=2387628 or http://dx.doi.org/10.2139/ssrn.2387628

Geert Bekaert

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 (Contact Author)

DIW Berlin ( email )

Mohrenstra├če 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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