Contagion among major world markets: a wavelet approach

Purpose - The purpose of this paper is to examine contagion among the major world markets during the last 25 years and propose a new way to analyze contagion with wavelet methods. Design/methodology/approach - The analysis uses a novel way to study contagion using wavelet methods. The comparison is made between co-movements at different time scales. Co-movement methods of the discrete wavelet transform and the continuous wavelet transform are applied. Findings - Clear signs of contagion among the major markets are found. Short time scale co-movements increase during the major crisis while long time scale co-movements remain approximately at the same level. In addition, gradually increasing interdependence between markets is found. Research limitations/implications - Because of the chosen method, the approach is limited to large data sets. Practical implications - The research has practical implications to portfolio managers etc. who wish to have better view of the dynamics of the international equity markets. Originality/value - The research uses novel wavelet methods to analyze world equity markets. These methods allow the markets to be analyzed in the whole state space.