‘Slow-burn’ spillover and ‘fast and furious’ contagion: a study of international stock markets
DOI: 10.1080/14697688.2014.952242
Title: ‘Slow-burn’ spillover and ‘fast and furious’ contagion: a study of international stock markets
Journal Title: Quantitative Finance
Volume: pages 1-26
Issue: pages 1-26
Publication Date: pages 1-26
Start Page: pages1-26
End Page: pages1-26
ISSN: 1469-7688
Author: Lei Wua, Qingbin Mengb* & Kuan Xuc*
Affiliations:
a School of Economics and Management, Beihang University, No.37 Xueyuan Road, Beijing 100191, China.
b School of Business, Renmin University of China, No. 59 Haidian Road, Beijing 100872, China.
c Department of Economics, Dalhousie University, Halifax, Nova Scotia B3H 4R2, Canada.
Abstract: ‘Fast and furious’ contagion across capital markets is an important phenomenon in an increasingly integrated financial world. Different from ‘Slow-burn’ spillover or interdependence among these markets, ‘fast and furious’ contagion can occur instantly. To investigate this kind of contagion from the US, Japan and Hong Kong to other Asian economies, we design a research strategy to capture fundamental interdependence, or ‘Slow-burn’ spillover, among these stock markets as well as short-term departures from this interdependence. Based on these departures, we propose a new contagion measure which reveals how one market responds over time to a shock in another market. We also propose international portfolio analysis for contagion via variance decomposition from the portfolio manager’s perspective. Using this research strategy, we find that the US stock market was cointegrated with the Asian stock markets during four specific periods from 3 July 1997 to 30 April 2014. Beyond this fundamental interdependence, the shocks from both Japan and Hong Kong have significant ‘fast and furious’ contagion effects on other Asian stock markets during the US subprime crisis, but the shocks from the US have no such effects.
Accepted: 30 Jul 2014

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