Pure contagion vs. financial interconnection in the subprime crisis context: Short- and long-term dynamics

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This paper examines the difference between pure contagion and financial interconnection by studying the U.S. and some American and Asian markets in the subprime crisis context. These markets are affected by the mortgage crisis, with data available from January 1, 2003 to December 30, 2011. The paper first identifies the turmoil period via the wavelet technique and adopts cointegration and Granger causality approaches by estimating vector autoregressive (VAR) and vector error correction models (VECM) models. Based on daily returns from stock market indices in five American countries (Mexico, Brazil, Canada, Argentina, and the U.S.) and eight Asian ones (Hong Kong, Japan, India, Indonesia, Malaysia, Singapore, Korea, and China), the results show eight cases of pure contagion and 10 cases of financial interconnection. In addition, there were high co-movements in the short term and low co-movements in the long term for financial interconnection cases. These findings have several implications for investors looking to diversify their portfolios internationally and for portfolio managers to expect and limit market risk. The results provide additional guidance to regulators and policymakers.

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    • Figure 1. Decomposition of the Haar wavelet’s Order 4 (U.S. index (S&P 500))
    • Table 1. Statistics summary during the total period
    • Table 2. ADF and DF-GLS tests of stock index series: stability period (crisis period)
    • Table 3. Bivariate cointegration between the U.S. and other countries: stability vs. crisis periods
    • Table 4. Multivariate cointegration test for the American and Asian regions: stability vs. crisis periods
    • Table 5. Linear Granger-causality tests between the US and other markets – stability period (crisis period)
    • Table 6. Results from the short- and long-term causality test for the region: U.S. with other countries – period of stability (crisis period)
    • Table 7. Pure contagion and financial interconnection identification: U.S. with other countries
    • Conceptualization
      Imen Zorgati, Asma Njima
    • Formal Analysis
      Imen Zorgati, Asma Njima, Hassen Benjenana
    • Investigation
      Imen Zorgati, Asma Njima, Hassen Benjenana
    • Methodology
      Imen Zorgati, Asma Njima
    • Project administration
      Imen Zorgati, Hassen Benjenana
    • Validation
      Imen Zorgati, Asma Njima
    • Visualization
      Imen Zorgati, Hassen Benjenana
    • Writing – original draft
      Imen Zorgati, Asma Njima, Hassen Benjenana
    • Software
      Asma Njima, Hassen Benjenana
    • Data curation
      Hassen Benjenana
    • Resources
      Hassen Benjenana
    • Writing – review & editing
      Hassen Benjenana