So what’s the final verdict on Contagion effect? From my readings in Schweser, there’s no empirical evidence to suggest that there’s a contagion effect among developed and emerging market equity markets. However, they do mention that contagion plays a role in the currency markets of emerging countries. The problem I have with this is we also know that currencies and equity markets and positively correlated in emerging markets, so if currencies suffer from contagion effect, why don’t equity markets?
equity market suffers from contagion as well but recovers much quicker, see thailand and mexico, neither currency have returned to its value before their respective currency crisis, but the their equity markets have move forward
There is contagion, but correlation is still the same…