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Bubbles, crashes, and financial market contagion: Evidence from G7 economies

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  • Escobari, Diego
  • Sharma, Shahil

Abstract

We investigate the bidirectional relationship between price bubbles, crashes, and financial market contagion using stock indices from G7 economies. Financial contagion across markets is captured using dynamic conditional correlations from a multivariate GARCH framework, while bubble and crash episodes are identified using a double recursive flexible window right-tailed ADF-based procedure. Our panel fixed-effects results reveal that contagion increases during U.S. stock market crashes, whereas there is not such relationship for bubbles. After accounting for U.S. market influence, we find that market-specific bubbles and crashes in other G7 countries also contribute to contagion, with the most pronounced effects observed during periods of synchronized crashes. Market-specific bubbles are associated with decreased contagion, while crashes with increased contagion. Panel Granger-causality tests show evidence of bidirectional relationships, where the results are consistent with a feedback loop in which contagion both results from and contributes to bubbles and crashes.

Suggested Citation

  • Escobari, Diego & Sharma, Shahil, 2026. "Bubbles, crashes, and financial market contagion: Evidence from G7 economies," Research in International Business and Finance, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:riibaf:v:86:y:2026:i:c:s0275531926001091
    DOI: 10.1016/j.ribaf.2026.103382
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    Keywords

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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