NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Global Crises and Equity Market Contagion

Geert Bekaert, Michael Ehrmann, Marcel Fratzscher, Arnaud J. Mehl

NBER Working Paper No. 17121
Issued in June 2011
NBER Program(s):   AP   IFM

Using the 2007-09 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. We find statistically significant evidence of contagion from US markets and from the global financial sector, but the effects are economically small. By contrast, there has been 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. This confirms the old “wake-up call” hypothesis, with markets and investors focusing substantially more on country-specific characteristics during the crisis.

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This paper was revised on June 29, 2012

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Document Object Identifier (DOI): 10.3386/w17121

Published: Geert Bekaert & Michael Ehrmann & Marcel Fratzscher & Arnaud Mehl, 2014. "The Global Crisis and Equity Market Contagion," Discussion Papers of DIW Berlin 1352, DIW Berlin, German Institute for Economic Research.

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