Financial contagion and the real economy

Vol: 
16/2010
Author name: 
Baur DG
Year: 
2010
Month: 
May
Abstract: 

The global financial crisis of 2008 was a crisis affecting both the financial sector and the “real economy”. This paper analyzes the transmission of unexpected shocks from the financial sector in the US to other countries and sectors. We test the hypothesis that the financial crisis spread from the financial sector to the real economy by infecting financial stocks and real economy stocks across most financial markets. The empirical analysis comprising ten sectors in 25 major developed and emerging stock markets shows that the crisis led to an increased co-movement of unexpected shocks and thus contagion in financial stocks globally. In contrast, the evidence for contagion from the financial sector to other sectors is weak and most sectors exhibit a decreased transmission of shocks during the financial crisis. The findings suggest that investors differentiated across sectors and countries despite the severity of the financial crisis and the increased level of uncertainty.

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