Contagion as Domino Effect in Global Stock Markets

Thijs Markwat, Erik Kole () and Dick van Dijk

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: This paper shows that stock market contagion operates through a domino effect, where small crashes evolve into more severe crashes. Using a novel unifying framework we model the occurrence of local, regional and global crashes in terms of past occurrences of these different crashes and financial variables. We find convincing evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Additionally, interest rates, bond returns and volatility affect the probabilities of different crash types, indicating interdependence. We show that in forecasting global crashes our model outperforms a binomial model for global crashes only.

Keywords: contagion; interdependence; stock market crises (search for similar items in EconPapers)
JEL-codes: G17 G3 M (search for similar items in EconPapers)
Date: 2008-11-05
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Citations: View citations in EconPapers (2)

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Journal Article: Contagion as a domino effect in global stock markets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:13835

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