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Contagion as a domino effect in global stock markets

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  • Markwat, Thijs
  • Kole, Erik
  • van Dijk, Dick

Abstract

This 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 Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 11 (November)
Pages: 1996-2012

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:11:p:1996-2012

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Contagion Stock market crises Interdependence Systemic risk;

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