Financial Contagion within a Small Country

Abstract

This study examines the behavior of financial contagion within the New Zealand stock market. The degree of financial contagion is measured by the coincidence of extreme stock returns. The extent of the effect and its economic significance are examined using the multinomial regression. The findings show that the contagion is highly persistent. Macroeconomic factors have a slightly stronger impact on the co-movement of extreme positive returns compared with the co-movement of extreme negative returns. There is little evidence showing that the contagion is determined by the fluctuation of foreign exchange rates, government bond yield, and the term spread.