Testing stock market contagion properties between large and small stock markets

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The heterogeneity of large and small stock market structures results in different degrees of cross-market contagion. The causality test reveals that large stock markets have less inner-market contagion and more cross-market contagion while smaller markets have more inner-market contagion and less cross-market contagion. Contagion tests indicate that the interaction effects between interdependence and crisis periods are significant so that cross-market contagion slope effects exist. Contagions that spread from small to large markets are often adverse but this is not necessarily the case with those that spread to the U.S. Remarkably, the largest market, the U.S.—unlike the UK, Germany, and France—is immune to most small market feedback. The CoVaR estimates reveal that China and Vietnam, which have high stock vitality have a greater contagion despite having low correlations among stock markets but the more robust U.S. market has lower CoVaR estimates although having high correlations among stock markets.