“Slow-Burn” Spillover and “Fast and Furious” Contagion: A Study of International Stock Markets

“Fast and furious” contagion across capital markets is an important phenomenon in an increasingly integrated financial world. Different from “slow-burn spillover” or inter- dependence among these markets, “fast and furious” contagion can occur instantly. To investigate this kind of contagion from the U.S., Japan, and Hong Kong to other Asian economies, we design a research strategy to capture fundamental interdependence, or “slow-burn spillover”, among these stock markets as well as short-term departures from this interdependence. Based on these departures, we propose a new contagion measure which reveals how one market responds over time to a shock in another market. We also propose international portfolio analysis for contagion via variance decomposition from the portfolio manager’s perspective. Using this research strategy, we find that the U.S. stock market was cointegrated with the Asian stock markets during the four specific periods from July 3, 1997 to April 30, 2014. Beyond this fundamental inter- dependence, the shocks from both Japan and Hong Kong have significant “fast and furious” contagion effects on other Asian stock markets during the U.S. subprime crisis, but the shocks from the U.S. have no such effects.