Global Stock Market Contagion: A study of the transmission mechanism of shocks during the 2008 financial crisis

Abstract: Tests for contagion between international equity markets have usually been based on the assumption of constant cross-market correlation. Due to time-varying correlations, these tests can generate biased results. We use a test that focuses on the transmission mechanism of shocks directly, searching for evidence of mean and volatility contagion during the two months following the bankruptcy of Lehman Brothers in September 2008. Empirical results for ten different European and American markets show strong evidence of mean contagion in five cases, but no volatility contagion. We find evidence of mean contagion for countries in Western Europe as well as for emerging market indices in Latin America and Eastern Europe.