Equity Market Contagion During the Global Financial Crisis: Evidence from the World's Eight Largest Economies

Abstract

The global financial crisis (2007)(2008)(2009)) saw sharp declines in stock markets around the world, affecting both advanced and emerging markets. In this paper we test for the existence of equity market contagion originating from the US to advanced and emerging markets during the crisis period. Using a latent factor model, we provide strong evidence of contagion effects originating in US equity markets to equity markets in both the advanced and emerging economies. In the aggregate equity market indices contagion from the US explains a large portion of the variance in stock returns in both advanced and emerging markets. However, evidence from the financial sector indices finds less evidence of contagion than the total indices, and this is particularly the case for the developed markets. This suggests that contagion effects are not strongly related to high levels of global integration.