Contagion as a domino effect in global stock markets
AbstractThis paper shows that stock market contagion occurs as a domino effect, where confined local crashes evolve into more widespread crashes. Using a novel framework based on ordered logit regressions we model the occurrence of local, regional and global crashes as a function of their past occurrences and financial variables. We find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Besides this form of contagion, interdependence shows up by the effect of interest rates, bond returns and stock market volatility on crash probabilities. When it comes to forecasting global crashes, our model outperforms a binomial model for global crashes only.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 33 (2009)
Issue (Month): 11 (November)
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Contagion Stock market crises Interdependence Systemic risk;
Other versions of this item:
- Markwat, T.D. & Kole, H.J.W.G. & van Dijk, D.J.C., 2008. "Contagion as Domino Effect in Global Stock Markets," ERIM Report Series Research in Management ERS-2008-071-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G3 - Financial Economics - - Corporate Finance and Governance
- M - Business Administration and Business Economics; Marketing; Accounting
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