Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies

•We test for the existence of equity market contagion during the global financial crisis.•We use a latent factor model to detect and measure the extent of contagion effects.•Contagion from the US explains a large portion of the variance in other markets.•The contagion effect in the financial sector is less, particularly in advanced markets.•Contagion effects are not strongly related to high levels of global integration.

The global financial crisis (2007-2009) saw sharp declines in stock markets around the world, affecting both advanced and emerging markets. In this paper we test for the existence of equity market contagion originating from the US to advanced and emerging markets during the crisis period. Using a latent factor model, we provide strong evidence of contagion effects in both advanced and emerging equity markets. In the aggregate equity market indices, contagion from the US explains a large portion of the variance in stock returns in both advanced and emerging markets. However, in the financial sector indices we find less evidence of contagion than in the aggregate indices, and this is particularly the case for the advanced markets. The results suggest that contagion effects are not strongly related to high levels of global integration.