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Discussion Paper Details

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Title: Global crises and equity market contagion

Author(s): Geert Bekaert, Michael Ehrmann, Marcel Fratzscher and Arnaud Mehl

Publication Date: June 2011

Keyword(s): contagion, country risk, current account, equity markets, factor model, financial crisis, financial policies, FX reserves, global transmission and market integration

Programme Area(s): International Macroeconomics

Abstract: Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries? economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old "wake-up call" hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.

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Bibliographic Reference

Bekaert, G, Ehrmann, M, Fratzscher, M and Mehl, A. 2011. 'Global crises and equity market contagion'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8438