Equity market-related economic uncertainty and the “economic contagion phenomenon”

Abstract

Purpose This study examines potential causal interactions between a dominant economy and its trading partners, with the view of verifying surmised economic contagion effects traditionally presumed to emanate from dominant economies toward trading partners. Design/methodology/approach The study used the Toda–Yamamoto Wald test approach to bi-variate causality analysis. Findings This study verified the existence of the economic contagion phenomenon; Estimated empirical evidence failed to fully support the presumption that such contagion effects mostly emanates from dominant economies toward trading partners, all things being equal. For instance, although this study found significant economic contagion effects emanating from the US economy toward the Chinese economy, the authors also detected six different uni-directional causal interactions with the direction of causality emanating from trading partners toward the US economy. Originality/value The uniqueness of this study stems not from its verification of the economic contagion phenomenon using equity market-related economic uncertainty as the potential contagion. This study fills a gap in the present literature by focusing on the happenings in the equity market as the potential candidate of the economic contagion phenomenon between a dominant economy and its key trading partners.