Global capital market interdependence and spillover effect of credit risk: Evidence from the 2007-2009 global financial crisis

Ming Yan William Cheung, Scott Fung, Shih Chuan Tsai

Research output: Contribution to journalArticle

49 Citations (Scopus)

Abstract

This article examines the impact of the 2007-2009 Global Financial Crisis on the interrelationships among global stock markets and the informational role of the TED spread as perceived credit risk. The current crisis originated from the dominant US market has a prompt and pervasive spillover effect into other global markets. Using the Vector Autoregressive (VAR) model, Granger causality test, cointegrating Vector Error Correction Model (VECM), we document enhanced leadership of the US market with respect to UK, Hong Kong, Japan, Australia, Russia and China markets during the crisis. Consistent with the contagion theory, the interdependence among international stock markets becomes stronger in the crisis. The TED spread serves as a leading 'fear' indicator and adjusts to new information rapidly during the crisis. While the impact of orthogonalized shocks from the US market on other global markets increases by at least two times during the crisis, the impact of orthogonalized shocks from the TED spread on global market indices increase by at least five times. Overall, these findings shed light on the dynamics of international stock market linkage and the spillover effect of credit risk.

Original languageEnglish
Pages (from-to)85-103
Number of pages19
JournalApplied Financial Economics
Volume20
Issue number1-2
DOIs
Publication statusPublished - 2010 Jan
Externally publishedYes

Fingerprint

Credit risk
Interdependence
Capital markets
Global financial crisis
Spillover effects
Global market
International stock markets
Vector autoregressive model
Granger causality test
Stock market
Vector error correction model
Market index
Contagion
Linkage
Russia
China market
Interrelationship
Japan
Hong Kong

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Global capital market interdependence and spillover effect of credit risk : Evidence from the 2007-2009 global financial crisis. / Cheung, Ming Yan William; Fung, Scott; Tsai, Shih Chuan.

In: Applied Financial Economics, Vol. 20, No. 1-2, 01.2010, p. 85-103.

Research output: Contribution to journalArticle

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