!VAR HAGENDOORN

Contagion in Financial Markets

It used to be said that if Wall Street coughs, Europe gets a cold. Given that various European companies have a dual listing in Europe and New York, have large holdings in the U.S. or depend on the dollar, it is not entirely surprising that markets are correlated.

When on February 27, 2007 the Shanghai Composite fell about 9 percent, stock markets around the world plummeted. This despite the fact that the sell-off in Shanghai was due to internal market dynamics and bore no relationship to news about the Chinese economy. The next day Asian markets dropped again in response to the heavy selling in Europe and New York. It was in other words a typical case of herding behavior.

However, the event also marked China's emergence as a force among the world's financial markets.