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Contagion as Domino Effect in Global Stock Markets

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Author Info
Markwat, T.D.
Kole, H.J.W.G.
Dijk, D.J.C. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)

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Abstract

This paper shows that stock market contagion operates through a domino effect, where small crashes evolve into more severe crashes. Using a novel unifying framework we model the occurrence of local, regional and global crashes in terms of past occurrences of these different crashes and financial variables. We find convincing evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Additionally, interest rates, bond returns and volatility affect the probabilities of different crash types, indicating interdependence. We show that in forecasting global crashes our model outperforms a binomial model for global crashes only.

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File URL: http://hdl.handle.net/1765/13835
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Publisher Info
Paper provided by 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 University Rotterdam. in its series Research Paper with number ERS-2008-071-F&A Revision_Date: 2009-10-28.

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Date of creation: 05 Nov 2008
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Handle: RePEc:dgr:eureri:1765013835

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Web page: http://www.erim.eur.nl/

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Related research
Keywords: contagion; stock market crises; interdependence;

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This page was last updated on 2009-11-4.

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