Financial contagion in real economy: The key role of policy uncertainty

Document Type

Article

Source of Publication

International Journal of Finance and Economics

Publication Date

1-1-2020

Abstract

© 2020 John Wiley & Sons Ltd This paper studies the spread of the Subprime Crisis and the European Sovereign Debt Crisis from Eurozone countries to the real economy by examining 10 sectors in major developed and emerging stock markets. First, we employ Cappiello et al., Journal of Financial Economics, 2006, 4, 537–572 model and copula functions to detect and cross-check the correlations and the contagion thereafter. Second, we uncover evidence of correlation behaviour between policy uncertainty indexes and stock market returns. The results demonstrate that no country and sector was immune to spillover effects, highlighting the limited effectiveness of policy makers for both the Subprime Crisis and the European Sovereign Debt Crisis. The empirical application provides evidence of significant volatility and tail dependence from the financial sector to many real sectors in the U.S. economy. Additionally, there is clear evidence that certain sectors, particularly Healthcare, Telecommunications, Utilities and Technology, were less severely affected by the crisis, as observed by Baur, Journal of Banking & Finance, 2011, 36, 2680–2692.

ISSN

1076-9307

Publisher

John Wiley and Sons Ltd

Disciplines

Business

Keywords

asymmetric DCC, contagion, copula, Eurozone debt crisis, spillover effects

Scopus ID

85089921289

Indexed in Scopus

yes

Open Access

no

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