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Wealth effect versus portfolio rebalancing in driving cross-market contagion: A time–frequency quantile approach

Author

Listed:
  • Zong, Jichuan
  • Xiong, Jingyu
  • Zhu, Xinxin

Abstract

Investor behavioral mechanisms driving cross-market contagion remain empirically disputed, with portfolio rebalancing and wealth effect offering competing predictions. We hypothesize that temporal aggregation bias may obscure how investor behaviors vary across time horizons. By analyzing 6 emerging and 9 developed markets (2004–2025) during four crises using a time–frequency quantile VAR model, we identify systematic pattern of investor-induced contagion mechanisms: portfolio rebalancing plays a relatively more important role in short-term transmission (1–5 days) and moderate stress, while wealth effect tends to drive medium- to long-term contagion (6–250 days) and severe distress scenarios, reflecting investors’ transition from strategic adjustment to forced liquidation. Both investor behaviors coexist with time-varying importance: wealth effect behavior generally amplifies as market stress intensifies from moderate to extreme levels. Notably, wealth effect exerts more consistent impacts between emerging and developed markets.

Suggested Citation

  • Zong, Jichuan & Xiong, Jingyu & Zhu, Xinxin, 2026. "Wealth effect versus portfolio rebalancing in driving cross-market contagion: A time–frequency quantile approach," Finance Research Letters, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:finlet:v:96:y:2026:i:c:s1544612326003430
    DOI: 10.1016/j.frl.2026.109813
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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