International Equity Markets Co-movements And Contagion: A Novel Perspective

Abstract

Our paper conducts an asset pricing perspective to investigate OECD equity markets co-movements and contagion during different crises. The paper aims at distinguishing between changes in cross-markets linkages during a crisis, on the one hand, and strong but stable cross-markets linkages and permanent shifts in these linkages, on the other hand. Our empirical setting relies on the three factor model of Bekeart and al. (2005, 2011) and differs by testing the co-movements in their double dimensions: interdependence and contagion during the Asian, the European Exchange Rate Mechanism (ERM) and the Global Financial crises in different regions. Our results highlight the existence of cross-sectional patterns both in regional and USA market correlations with OECD equity markets. Evidence of contagion exists during the ERM and the Global Financial crisis, but no contagion caused by the Asian crisis. Our findings lead to an international diversification opportunity and suggest that contagion effects are not strongly related to high levels of global integration.