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This paper shows that stock market contagion operates through a domino effect, where confined local crashes evolve into more widespread crashes. Using a novel framework based on ordered logit regressions the authors model the occurrence of local, regional and global crashes as a function of their past occurrences crashes and financial variables. They find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Besides this form of contagion, interdependence shows up by the effect of interest rates, bond returns and stock market on crash probabilities.
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