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Stock Market Contagion: a New Approach

Author

Listed:
  • Štefan Lyócsa

    (Slovak Academy of Sciences
    University of Economics)

  • Roman Horváth

    (Charles University
    Germany and University of Ss. Cyril and Methodius)

Abstract

We develop a new approach to assess stock market contagion that involves examining whether higher unexpected volatility during extreme market downturns of the originating market is associated with increased return co-exceedance with the recipient market. Using daily data from 1999 to 2014 and quantile regressions with a wide set of control variables, we find evidence of contagion from the U.S. stock market to the six largest developed stock markets (Japan, United Kingdom, France, Germany, Hong Kong, and Canada). In addition, our results show that contagion is not solely a crisis-specific event, because we find contagion present over the whole sample period. Interestingly, the return co-exceedances during extreme market downturns are not driven by fundamentals, further supporting our results regarding contagion.

Suggested Citation

  • Štefan Lyócsa & Roman Horváth, 2018. "Stock Market Contagion: a New Approach," Open Economies Review, Springer, vol. 29(3), pages 547-577, July.
    • Handle: RePEc:kap:openec:v:29:y:2018:i:3:d:10.1007_s11079-018-9481-4
    DOI: 10.1007/s11079-018-9481-4
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    More about this item

    Keywords

    Contagion; Volatility; Stock markets; Co-exceedance;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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