The spatial heterogeneity of international financial contagion during the 2007–9 crisis: A sectoral perspective

Abstract

Does geography matter for the transmission and experience of financial crises, or does our modern globalised world display uniformity in how world-wide financial shocks affect different countries? Using a rich dataset of stock market returns disaggregated by country sectors, this paper explores how the 2007–9 financial crisis was transmitted globally. Employing and extending an empirical model which captures different forms of financial contagion and accounts for time trends in financial linkages, our results support the claim that geography matters, which is manifested by a substantial amount of spatial heterogeneity in how financial contagion spreads, observed at the country sectoral level. Our analysis further reveals that susceptibility of country-sectors to global contagious shocks depends on the contagion type experienced, and was partially driven by countries’ stock market sophistication and openness to foreign trade and to flows of capital and people.