Purpose – The purpose of this paper is to investigate empirically contagion channels of the 2007 US subprime financial crisis by employing a multivariate GARCH model for four major, international equity markets, namely the USA, EMU, China and Japan. Design/methodology/approach – In this study, contagion channels of the 2007 US subprime financial crisis are investigated empirically by employing a multivariate GARCH model for four major, international equity markets, namely the USA, EMU, China and Japan. Findings – There is empirical evidence of contagion in all markets with the US market through various channels, which have not been discussed in other related studies. Specifically, the empirical results suggest that Japanese and EMU markets have been directly affected from the crisis. However, while China's equity market has been mainly unaffected by the US subprime crisis, has been affected indirectly through Japan. Moreover, the Japanese equity market exhibits positive and significant spillovers effects with China and EMU, revealing an indirect volatility transmission channel of US subprime crisis. Research limitations/implications – Further research could consider the asymmetric effects on conditional covariance through, for example, asymmetric generalized dynamic conditional correlation models. All under examination markets show evidence of contagion through different channels. Practical implications – Despite the financial advices for diversification, since the increasing globalization and stock market interdependence throughout the last 15 years, through the US subprime crisis equity investors had fewer opportunities for diversification. From policy makers' perspective, they should carefully examine and uncover possible decoupling strategies to insulate these economies from contagion in future crises. Social implications – This study provides useful information to international organizations, such as World Bank and World Trade Organization (WTO) in order to protect markets from contagion during future crises. Originality/value – A novel finding of this paper is the indirect channel of contagion (i.e. Japanese market) for Chinese market. This indirect channel may help explain why China's equity market performed badly in 2008 after the subprime crisis in the USA emerged.
