Contagion Effect of Natural Disaster and Financial Crisis Events on International Stock Markets

Kuo-Jung Lee, Su-Lien Lu and You Shih
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Kuo-Jung Lee: Department of Commerce Automation and Management, National Pingtung University, Pingtung City 900, Taiwan
Su-Lien Lu: International Bachelor Degree Program in Finance, National Pingtung University of Science and Technology, Neipu Pingtung 912, Taiwan
You Shih: International Bachelor Degree Program in Finance, National Pingtung University of Science and Technology, Neipu Pingtung 912, Taiwan

JRFM, 2018, vol. 11, issue 2, 1-25

Abstract: In the contemporary world bustling with global trade, a natural disaster or financial crisis in one country (or region) can cause substantial economic losses and turbulence in the local financial markets, which may then affect the economic activities and financial assets of other countries (or regions). This study focuses on the major natural disasters that occurred worldwide during the last decade, especially those in the Asia–Pacific region, and the economic effects of global financial crises. The heteroscedasticity bias correlation coefficient method and exponential general autoregressive conditional heteroscedasticity model are employed to compare the contagion effect in the stock markets of the initiating country on other countries, determining whether economically devastating factors have contagion or spillover effects on other countries. The empirical results indicate that among all the natural disasters considered, the 2008 Sichuan Earthquake in China caused the most substantial contagion effect in the stock markets of neighboring Asian countries. Regarding financial crises, the financial tsunami triggered by the secondary mortgage fallout in the United States generated the strongest contagion effect on the stock markets of developing and emerging economies. When building a diversified global investment portfolio, investors should be aware of the risks of major natural disasters and financial incidents.

Keywords: contagion effect; spillover effect; asymmetric volatility; natural disaster; financial crisis (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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