CFCM 14/08: The Effects of News Events on Market Contagion: Evidence from the 2007- 2009 Financial Crisis

Abstract

In this paper, we use the quantile regression technique together with the coexceedance, a contagion measure, to assess the extent to which news events contribute to contagion in the stock markets during the crisis period between 2007 and 2009. Studies have shown that, not only the subprime crisis leads to a global recession, but the effects on the global stock markets have also been significant. We track the news events, both in the UK and the US, using the global recession timeline. We observe that the news events related to ad hoc bailouts of individual banks from the UK have a contagion effect throughout the period for most of the countries under investigation. This, however, is not found to be the case for the news events originating from the US. Our findings regarding the evidence of contagion effects in the UK reinforce the argument that spreads and contagion — an outcome of the risk perception of financial markets — are solely a result of the behaviour of investors or other financial market participants.

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Authors

Thanaset Chevapatrakul and Kai-Hong Tee

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