Discount rate or cash flow contagion? Evidence from the recent financial crises

Breaking the US and Greek equity market returns into a discount rate component and a cash flow component by the method of Campbell (1991), the study investigates the discount rate and cash flow contagion of the subprime mortgage crisis and European sovereign debt crisis to the Nordic equity markets. The study shows that the subprime crisis displays both discount rate contagion and cash flow contagion to the Nordic markets and the effect of discount rate contagion is more pronounced. The sovereign debt crisis, on the other hand, does not show either discount rate contagion or cash flow contagion to the Nordic markets. However, the study provides some evidence that expectations of lower future cash flows resulting from the sovereign debt crisis spread to the Finnish market.