Contagion and Industry Risk

Abstract

This abstract was created post-production by the JFI Editorial Board.

This paper tests whether contagion can occur at the industry level, in particular the banking industry. The empirical results indicate strong contagion effects in the conditional means of bank stock returns after systematic risks have been accounted for. Specifically, the lead/lag relationships appear to be multidirectional among four banking sectors since the return shocks originating in anyone of the markets tend to spill over to the other three markets. As for the contagion-in-volatility effects, they are not significant. In addition, the global industry risk is significantly priced, suggesting the importance of incorporating the industry risk into the conditional ICAPM.