Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies

Abstract

The global financial crisis (2007)(2008)(2009)) saw sharp declines in stock markets around the world, affecting both advanced and emerging markets. In this paper we test for the existence of equity market contagion originating from the US to advanced and emerging markets during the crisis period. Using a latent factor model, we provide strong evidence of contagion effects originating in US equity markets to equity markets in both the advanced and emerging economies. In the aggregate equity market indices contagion from the US explains a large portion of the variance in stock returns in both advanced and emerging markets. However, evidence from the financial sector indices finds less evidence of contagion than the total indices, and this is particularly the case for the developed markets. This suggests that contagion effects are not strongly related to high levels of global integration.

An Update on EMU Sovereign Yield Spread Drivers in Times of Crisis: A Panel Data Analysis

“…These findings are consistent with those reported by Gómez-Puig and Sosvilla-Rivero (2014a) or Dungey and Gajurel (2013) who support the idea that (since they are not mutually exclusive), a 17 The results of this sensitivity analysis to the exclusion of each country one at a time and to the elimination of the peripheral and core countries are not shown here, but are available from the authors upon request. It is interesting to note that these two groups roughly correspond to those found in Jacquemin and Sapir (1996), applying principal component and cluster analyses to a wide set of structural and macroeconomic indicators, to form a homogeneous group of countries.…”

EMU Sovereign Debt Market Crisis: Fundamentals-Based or Pure Contagion?

“…These findings are in line with the literature that states that the two types of contagion are not necessary mutually exclusive (see Dungey and Gajurel, 2013), and also with the results of Caporin et al (2013), who, using a Bayesian quantile regression approach to measure contagion, obtain that there is no change in the intensity of the transmission of shocks between European countries during the onset of the sovereign debt crisis. Accordingly, the common shift observed in spreads might be the outcome of the "interdependence" (or "fundamentals-based" contagion) that has always been present in the markets.…”

“…All in all, then, the literature includes two groups of theories (not necessarily mutually exclusive -see Dungey and Gajurel, 2013) to explain crisis transmission mechanisms. One group argues that the therefore cause a crisis.…”

Financial Stress Transmission in EMU Sovereign Bond Market Volatility: A Connectedness Analysis

“…This literature includes two groups of theories which, though not necessarily mutually exclusive (see Dungey and Gajurel, 2013), have fostered considerable debate. On the one hand, since fundamentals of different countries may be interconnected by their cross-border flows of goods, services, and capital, or common shocks may adversely affect several economies simultaneously, transmission between countries may occur.…”