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The spillover and contagion effects of sovereign risk on stock markets

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  • Gnagne, Pascal Xavier
  • Simo-Kengne, Beatrice D.
  • Manguzvane, Mathias Mandla

Abstract

This study examines the spillover effects of sovereign risk on international stock markets using a dynamic spatial Durbin model (SDM) on a panel of forty countries from 2009Q1 to 2024Q2. The findings show that an increase in sovereign risk, as measured by CDS spreads, leads to a significant decrease in both local and foreign stock prices, with 0.027 percent reductions across foreign markets on average. These effects are transmitted through geographical, and economic and financial channels, with exchange rates, gross fixed capital formation, and industrial production playing crucial roles in influencing stock market performance. Additionally, the negative (positive) spillover effects from rising gross fixed capital formation and sovereign risk (industrial production) demonstrate how foreign markets are more impacted than domestic ones. The study highlights the interconnected nature of global financial markets, reinforcing the need for coordinated international policy responses to mitigate the transmission of sovereign risk across borders. These findings provide new insights into how global economic factors influence stock market volatility, particularly through specific transmission channels, underscoring the importance of multilateral collaboration in managing sovereign risk.

Suggested Citation

  • Gnagne, Pascal Xavier & Simo-Kengne, Beatrice D. & Manguzvane, Mathias Mandla, 2024. "The spillover and contagion effects of sovereign risk on stock markets," Economic Modelling, Elsevier, vol. 141(C).
  • Handle: RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324002785
    DOI: 10.1016/j.econmod.2024.106921
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    More about this item

    Keywords

    Sovereign risk; Stock markets; Spatial panel econometrics; Geographical distance; Economic and financial distance; Spillover effects; Contagion effects;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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