FINANCIAL CONTAGION OF U.S. SUBPRIME CRISIS BASED ON FIRM CHARACTERISTICS

Abstract

This paper is aimed to investigate financial contagion, incurred by U.S. Subprime crisis, to other international equity markets. Focusing on firm level data, based on several types of firm characteristics. Using the dynamic conditional correlation model (DCC) to capture the shift in the time varying correlation during 2003-2009 and construct indices, representing of each type of firm characteristic when examine financial contagion in ten major equity markets. Evidence shows that some firm characteristic can be applied to lessen contagion effect, incurred by Subprime, such as stock with large capital or stock of firms with high ROA. In addition, this paper also investigate the impact of unexpected in policy rates to stock market correlations during Subprime crisis period. The finding suggests that an unexpected change in monetary policy rates from the U.S. still performs a significant role in determining the pattern of dynamic conditional correlation in several markets.