The 2008 financial crisis: Stock market contagion and its determinants

• We study worldwide bi- and uni-directional contagion during the 2008 GFC.
• Contagion is not confined to emerging markets.
• Mature financial markets in the sample transmit and receive contagion.
• Country markets are less influenced by regions than by other country markets.
• Economic fundamentals and investors’ risk aversion contribute to contagion.

In this paper, we investigate worldwide contagion and its determinants during the 2008 financial crisis. Utilizing an international sample of returns from 2003 to 2009, we consider both uni- and bi-directional contagion. After controlling for crisis-related volatility, we find strong evidence that cross-market linkages increase among many financial markets. In contrast to previous crises, contagion following the 2008 global financial crisis is not confined to emerging markets. The United States and other mature financial markets in the sample transmit and receive contagion. Country markets are less influenced by regions than they are by other country markets. We also construct variables that represent relative changes in economic variables before and during the crisis. We find that both economic fundamentals such as trade structure, interest rates, inflation rates, industrial production, and regional effects, and investors’ risk aversion contribute to international contagion.

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