||This study tests whether contagion effects existed during the “subprime|
mortgage crisis” among the equity markets of the US, the EU, Asia and emerging
markets. The time-varying correlation coefficients are estimated by the dynamic
conditional correlation (DCC) of Engle (2002), using a multivariate GJR-GARCH
with AR (1) model. The empirical findings show that the conditional correlation
coefficients of stock returns between the U.S. and others countries were positive and
that the contagion effect exists among stock markets.
Financial markets displayed contagion effects, in that the global equity markets
were confronted with elevated systematic risk at the same time. Therefore, this study
further examines the role of systematic risk in the equity market of each country. I
used the rolling formulae, the MV-DGP, and DCC-GARCH (1, 1) models to estimate
the CAPM beta and downside betas. This study found higher systematic risk
(downside systematic risk) in the stock markets of the United States, Germany, France
and Brazil, which had beta values nearly above one, while the Chinese stock market
had the lowest systemic risk and served as a hedge for investors and fund managers.
Finally, the results demonstrate that DCC-HW beta can capture some downside
linkages between the market portfolios and expected stock returns, while these
linkages cannot likely be captured by the CAPM beta.