Financial Contagion and the Real Economy

Abstract

This paper analyzes the incidences of sector-specific contagion during the Global Financial Crisis of 2007-2009. The empirical analysis comprising ten sectors in 25 major developed and emerging stock markets shows that the crisis led to an increased co-movement of returns and thus contagion among financial sector stocks across countries and between financial sector stocks and real economy stocks both across countries and within a country. The results demonstrate that multiple sectors were infected in most countries and that no country was immune to the adverse effects of the crisis. The results provide information on the effectiveness of governments’ stimulus packages to limit the spreading of a financial crisis.