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Crises and Contagion in Equity Portfolios

Author

Listed:
  • Christos Floros

    (Department of Accounting and Finance and Laboratory of Accounting and Financial Management (LAFIM), Hellenic Mediterranean University, 71410 Heraklion, Greece)

  • Dimitrios Vortelinos

    (Department of Accounting and Finance and Laboratory of Accounting and Financial Management (LAFIM), Hellenic Mediterranean University, 71410 Heraklion, Greece)

  • Ioannis Chatziantoniou

    (Department of Accounting and Finance and Laboratory of Accounting and Financial Management (LAFIM), Hellenic Mediterranean University, 71410 Heraklion, Greece)

Abstract

We examine the international impact of recent financial crises on contagion dynamics within international equity portfolios. First, we highlight the importance of macroeconomics for portfolio weighting for each region, and then we examine contagion via a structural regime-switching model and a contagion test. We also examine sources of contagion using regime variables, crisis events, and macroeconomic variables. In particular, we study the Argentine debt crisis, the US financial crisis, and the EU sovereign debt crisis. The macroeconomic variables include changes in market capitalization, trade integration, GDP growth, inflation rate, and interest rate. We also employ two classifications, one relating to the portfolio weighting scheme and another one that considers implied global and regional betas. The empirical findings reveal the existence of financial contagion for all the crises that we investigate. Both methods produce similar results. Stronger contagion is evident for global rather than regional betas. Europe is the region with the highest level of contagion and the one mostly affected by the crises. As far as macroeconomic variables are concerned, they are very important in two ways. They statistically significantly explain contagion, while they also reveal contagion under various portfolio weighting schemes. Both methods suggest that the Argentinian crisis mainly contributes to contagion. The research implications suggest that asset allocation and portfolio management should consider both the global and the regional aspects of contagion as differences can occur.

Suggested Citation

  • Christos Floros & Dimitrios Vortelinos & Ioannis Chatziantoniou, 2024. "Crises and Contagion in Equity Portfolios," Economies, MDPI, vol. 12(7), pages 1-32, July.
    • Handle: RePEc:gam:jecomi:v:12:y:2024:i:7:p:168-:d:1427059
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    References listed on IDEAS

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    1. Ahmed BenSaïda & Houda Litimi, 2021. "Financial contagion across G10 stock markets: A study during major crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4798-4821, July.
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    3. Cho, Sungjun & Hyde, Stuart & Nguyen, Ngoc, 2015. "Time-varying regional and global integration and contagion: Evidence from style portfolios," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 109-131.
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