Financial contagion and the real economy

• Published in: Journal of banking & finance 2012-10, Vol.36 (10), p.2680-2692
• Main Author: Baur, Dirk G.
• Format: Article
• Language: English
• Subjects: Contagion; Diversification; Economic crisis; Financial crisis; Financial crisis identification; Financial services; Global economy; International finance; Portfolio management; Rates of return; Sector-specific contagion; Social contagion; Stock exchange; Stock returns; Studies
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2011.05.019

► Analysis of spread of shocks from financial sector to real economy. ► Test of different channels of financial contagion across countries and sectors. ► Novel approach of (financial) crisis identification. ► Heterogeneity of contagion effects across countries and sectors. ► Evidence for effectiveness of diversification during the crisis. This paper studies the spread of the Global Financial Crisis of 2007–2009 from the financial sector to the real economy by examining ten sectors in 25 major developed and emerging stock markets. The analysis tests different channels of financial contagion across countries and sectors and finds that the crisis led to an increased co-movement of returns among financial sector stocks across countries and between financial sector stocks and real economy stocks. The results demonstrate that no country and sector was immune to the adverse effects of the crisis limiting the effectiveness of portfolio diversification. However, there is clear evidence that some sectors in particular Healthcare, Telecommunications and Technology were less severely affected by the crisis.