International contagion through financial versus non-financial firms

The role of financial firms in the transmission of financial shocks across countries is well recognized in the literature. However, contagion through non-financial firms has not received much attention. This study examines the role of financial vis-à-vis non-financial firms in transmitting shocks across countries using a dynamic conditional correlation analysis. We provide empirical evidence from a sample of 49 countries. A novel finding of our study is that non-financial firms play a more pronounced role in the cross-market transmission of shocks than financial firms. Financial contagion is positively related to the level of equity market development and bilateral trade intensity. It is higher during periods of US economic downturns and financial crises. Given that the extent of international contagion varies across economic states and is more prevalent in the non-financial than in the financial sector, this study has implications for global sector rotation strategies.