Diffusion of crisis signals across the world: evidence from subprime crisis of 2008-2009

Sruthi Rajan (Department of Commerce, Pondicherry University, Pondicherry, India)
Shijin Santhakumar (Department of Commerce, Pondicherry University, Pondicherry, India)

International Journal of Emerging Markets

ISSN: 1746-8809

Publication date: 16 April 2018



The innovations in fundamentals coupled with noise traders induce co-movement in diverse markets. This co-movement in equity markets which is evidenced higher during the turmoil period influences economic fundamentals of a country dissimilar in nature. The purpose of this paper is to examine whether economic fundamentals or investors’ behavior attributable to disturbances across the world are the rationale behind the crisis transmission, and thereby distinguish fundamental-based contagion from investor-induced contagion.


Initially, the study investigates the role of macroeconomic fundamentals and stock returns on crisis occurrence using panel probit estimates. Additionally, ordinary least squares estimates controlling the influence of fundamentals on domestic return capture the discrete country effect measuring the influence of domestic as well as foreign economic fundamentals along with foreign returns on the domestic stock index.


The empirical results reveal that foreign country stock index returns are having a significant influence on domestic returns besides a prominent role in crisis occurrence. The binary probit model confirmed the influence of both macroeconomic factors and foreign returns in crisis occurrence. The OLS estimates found evidence for investor-induced contagion in the crisis period where the effects of economic fundamentals are small in comparison to foreign market returns that are mainly dominant in pre- and post-crisis period.

Research limitations/implications

The propagation of crisis from one market to other would enable the policy makers to make clear regulations at right time to control for the crisis in future. The results can help the policy makers as well as investors in reducing the impact of the crisis in future by clearly monitoring the behavior of the factors under study.


The current study addresses the role of macro fundamentals and investors influence in crisis propagation. Adopting subprime crisis of 2008-2009 as a reference point and separating the sample period into pre-crisis, crisis and post-crisis period, the study explains how badly the other 30 markets impacted the crisis that emerged in the USA.



Rajan, S. and Santhakumar, S. (2018), "Diffusion of crisis signals across the world: evidence from subprime crisis of 2008-2009", International Journal of Emerging Markets, Vol. 13 No. 2, pp. 410-430. https://doi.org/10.1108/IJoEM-04-2017-0113

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