Integration and risk contagion in financial crises: Evidence from international stock markets

Abstract We examine the size of contagion (i.e., integration and co-movement) of weighted portfolios on a global level determining whether the amplification of transmission channels among either emerging or developed financial markets can be affected by different values of a country's characteristics (macro-economic variables) on a regional and global level. To this end, we investigate a large sample of 4577 trading days from sixty-eight international equity markets, taking into consideration both the regional and global setting. The dataset begins on January 3, 2000 and ends on August 31, 2017. The employed methodology concerns a regime-switching generalized autoregressive conditional heteroskedasticity model in accordance with a worldwide regional-local capital asset pricing model. Moreover, two different contagion tests are utilized to examine whether international equity portfolios experienced contagion effects through increased co-movements during periods of financial crises. Our key findings point to distinct shifts in co-movement that are detected either on the regional or global level. The robustness analysis provides more evidence of the contagion effect at the regional level from the US crisis.