Abstract
The contagion of financial crises surrounding the markets around the world has been in the forefront of academic and public discussions. In this paper, we attempt to study the “contagion effect” of the stock market crises around the world by studying the correlations of global stock returns and volatility. We analyze the daily returns of major stock indexes around the world to discover the timing and path of the transmission of shocks that manifest themselves in stock market returns. We construct VARs of major stock market index returns and volatilities. Our work differs from the literature in analyzing spillover effects between emerging markets and other major stock markets.
Highlights
The contagion of financial crises surrounding the markets around the world has been in the forefront of academic and public discussions due to the experiences of Mexico in 1994, Indonesia, Japan and other Asian countries in 1997 and 1998, Russia in 1998, and Brazil in 1999
Using Bloomberg Historical Data provided by Bloomberg LP, we study the daily returns on major stock indexes around the world in a theoretical vector auto-regression (VAR), which is a popular method of analyzing the dynamics of economic systems
This paper deals with the question of how to measure contagion, instead of providing a list of all its possible definitions and procedures to measure it, this paper concentrates on the two most frequently asked questions raised by applied papers in this area: First, what are the channels through which shocks are propagated from one country to another? In other words, is it the trade, macro similarities, common lender, learning, or market psychology? What determines the degree of contagion? And second, is the transmission mechanism stable over time? Or does it change during the crises?
Summary
The contagion of financial crises surrounding the markets around the world has been in the forefront of academic and public discussions due to the experiences of Mexico in 1994, Indonesia, Japan and other Asian countries in 1997 and 1998, Russia in 1998, and Brazil in 1999 In all these cases, a number of countries experienced increased volatility and co-movement of asset prices in the aftermath of a dramatic movement in one stock market. There are different definitions of contagion widely used in the literature Contagion has both been defined as increased co-movement or increased linkages across markets after shocks. The former definition is broader and refers to increased co-movement of asset prices in times of high volatility as contagion. A summary of major findings and directions for future research conclude the paper
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