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Contagion as Domino Effect in Global Stock Markets

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  • Markwat, T.D.
  • Kole, H.J.W.G.
  • van Dijk, D.J.C.

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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Bibliographic 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 ERIM Report Series Research in Management with number ERS-2008-071-F&A.

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Date of creation: 05 Nov 2008
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Handle: RePEc:ems:eureri:13835

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Web page: http://www.erim.eur.nl/
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Keywords: contagion; interdependence; stock market crises;

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