Debt and Financial Market Contagion

We investigate the role of public, private, and external debt in explaining the propagation of …nancial shocks during three major …nancial crises from 2007-2013. For our analysis, we construct indices of crisis severity in equity markets based on di¤erent tests of contagion and investigate whether the transmission of crises across countries can be related to similar debt conditions. We compare the role of debt stocks and ows to traditional channels for contagion based on regional and trade linkages. Our main …nding is that, along with regional linkages, public and external debt play a more important role than trade linkages in driving contagion across equity markets.