Stock Market Contagion during the Global Financial Crises: Evidence from the Chilean Stock Market

Sakthi Mahenthiran,Berta Silva,Tom Gjerde

doi:10.3390/ijfs8020026

Sakthi Mahenthiran, Berta Silva + Show 1 more

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https://doi.org/10.3390/ijfs8020026

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Abstract

The study examines evidence for the transmission of the US and EU financial crises via investor holdings into the Chilean stock market following two global financial crises, in 2008 and 2011. The study modified the models of Bekaert et al. (2014), and Dungey and Gajurel (2015) on the 2007–2009 global financial crisis and extends the period to include the European debt crisis of 2010–2011. The study produced three main contributions. First, changes in the equity holdings of retail investors were a key source of contagion following the 2008 US financial crisis. Second, investor herding during the 2011 financial crisis is shown to be low based on the co-movement of equity holdings between the four investor groups studied. Third, investor behavior during the 2011 EU crisis differs from that of the 2008 US financial crisis, which we attribute to firms in Chile adopting international financial reporting standards (IFRS) and improving their corporate governance. We compared the findings to the prior contagion studies that rely on Chilean return data to highlight the contributions to international financial research, particularly as it relates to the functioning of emerging capital markets during financial crises.

Highlights

Investor herd behavior is defined as an intention of investors to mimic the behavior of other investors
Fair_value is positively correlated with Pension_funds and Mutual_funds at the p < 0.10 l and p < 0.01 levels, but negative and significantly correlated with Retail, Zero_ret_days, and the Financial_sector dummy at the p < 0.05 level. These results suggest that retail investor behavior is different from the other groups, and the financial sector is less likely to have adopted fair value reporting of assets and liabilities
Significance is marginal for the relationship with the EU and Global equity markets in Models 2 and 3, with p < 0.10. These results indicate that lower equity returns in the local Chilean market and the US market during the 2008 GFC are associated with lower retail investor holdings, and allowing for marginal significance on the EU and global markets, the result holds for all three foreign markets

Summary

Introduction

Investor herd behavior is defined as an intention of investors to mimic the behavior of other investors. It is argued that investors ignore the fundamental analysis to explain stock prices’ movements and instead base their decisions on aggregate market behavior, which has been found to be the case during the periods of large market movements (Chang et al 2000; Bui et al 2018) This may be the case with the coronavirus-related financial shock that is rattling the global financial markets in 2020. The tendency of investors to sell in unison during a global financial market panic is termed investor “herding” and provides a potential explanation for a portion of the observed global co-movement in asset prices Negative aspects of this type of contagion can be severe and include a reduction in the benefits from portfolio diversification, adverse effects on wealth and economic growth, and greater risk management issues for investors and policy makers (Connolly and Wang 2000; Kyle and Xiong 2001)

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