Financial Contagion During Stock Market Bubbles

42 Pages Posted: 12 Feb 2021

See all articles by Diego Escobari

Diego Escobari

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance; Texas A&M University - Department of Economics

Shahil Sharma

Texas A&M University (TAMU) - San Antonio

Date Written: October 10, 2020

Abstract

We investigate the role of bubbles on financial contagion using a set of developed economies. First, using the recursive flexible window right-tailed ADF-based procedure, we date stamp bubble periods in stock index series. Second, we capture contagion with a DCC multivariate GARCH framework. In a third step, we construct a panel by pooling across the time-series dynamic conditional correlations and bubbles to estimate various dynamic panel specifications that consider the endogenous nature of bubbles. We find statistically significant decreases in the dynamic correlations during periods of bubbles, which shows that the financial contagion between pair of countries diminishes when any of the two countries in the pair is going through a bubble period. This implies that during bubble periods investors are looking for an investment opportunity within their economy and rely less on international diversification. However, decrease in contagion between two economies could provide ample diversification opportunities for portfolio managers.

Keywords: Financial contagion; Stock markets; Bubbles; Dynamic correlations, Dynamic panels

JEL Classification: F30; G15

Suggested Citation

Escobari, Diego and Sharma, Shahil, Financial Contagion During Stock Market Bubbles (October 10, 2020). Available at SSRN: https://ssrn.com/abstract=3747334 or http://dx.doi.org/10.2139/ssrn.3747334

Diego Escobari

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

HOME PAGE: http://faculty.utrgv.edu/diego.escobari

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

Shahil Sharma (Contact Author)

Texas A&M University (TAMU) - San Antonio ( email )

One University Way
San Antonio, TX 78224
United States

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