Bekaert, Geert Ehrmann, Michael Fratzscher, Marcel Mehl, Arnaud
Year of Publication:
DIW Discussion Papers 1352
We analyze the transmission of the financial crisis of 2007 to 2009 to 415 country-industry equity portfolios. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the U.S. and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries' economic fundamentals. This confirms the wake-up call hypothesis, with markets focusing more on country-specific characteristics during the crisis.
contagion financial crisis equity markets global transmission market integration country risk factor model financial policies FX reserves current account