Debt and Financial Market Contagion
33 Pages Posted: 9 Feb 2015
Date Written: January 27, 2015
We investigate the role of public, private, and external debt in explaining the propagation of financial shocks during three major financial crises from 2007-2013. For our analysis, we construct indices of crisis severity in equity markets based on different tests of contagion and investigate whether the transmission of crises across countries can be related to similar debt conditions. We compare the role of debt stocks and flows to traditional channels for contagion based on regional and trade linkages. Our main finding is that, along with regional linkages, public and external debt play a more important role than trade linkages in driving contagion across equity markets.
Keywords: Contagion, debt, European debt crisis, financial crisis, Great Recession, trade linkages, regional linkages
JEL Classification: C51, G01, G15
Suggested Citation: Suggested Citation