Summary: Summary: “Contagiousness” is one of the three basic characteristics of a stock price crash in that the contagious effects of a stock price crash may generate systemic financial risk. However, although scholars and regulators have recognized that stock price crashes can be contagious, there has been little in-depth follow-up research on the mechanism and channels of stock price crash contagion. As a result, there is little theoretical support for regulators to deal with the systemic financial risk caused by stock price crash contagion. Therefore, in this paper, we construct an analytical framework of stock price crash contagion based on investors' expectations and liquidity constraints, and examine the mechanism and channels of stock price crash contagion using data on the international capital market. Our results provide theoretical and empirical evidence for researchers and regulatory bodies to develop effective strategies for responding to stock price crash contagion. First, based on the literature, we propose two theoretical hypotheses concerning stock price crash contagion, namely, investors' rational expectations and liquidity constraints lead to contagion. Second, we construct a two-stage rational expectation equilibrium model based on informed traders and uninformed traders. The related securities crash signal is used as public information, and the decision-making model of informed and uninformed traders is introduced to analyze the contagion mechanism of stock price crash that investors expect to modify. Given that the collapse of related securities during a crash increases the liquidity constraints of informed traders, this paper identifies investors' liquidity constraints as a contagion mechanism of stock price crashes. Third, based on the data on the capital markets of 28 countries and regions from 2000 to 2016, we construct an empirical model to test the contagion of a global stock price crash. The test sample covers America, Europe, Africa, Asia, and Australia, and the results confirm the contagiousness and contagion mechanism of the stock price crash. Our analyses produce the following results. First, under the consistent expectations of investors, the prices of related securities assets deviate significantly from the mean value. Specifically, when a crash occurs, investors lower the prices of the target securities, which lead to stock price crash contagion. Second, insufficient liquidity of related securities is negatively related to the price of the target securities, such that insufficient liquidity of the related securities increases the probability of a collapse in the stock prices of the target securities. Third, a stock price crash can spread contagiously in countries or regions that have related capital markets. We also conduct a test of the contagion adjustment effect of a stock price crash. The test results show that improving the information transparency in the capital market and strengthening financial control can help reduce the contagious effects of stock price crashes in related countries or regions. To improve the robustness of our findings, we use the negative return skewness coefficient NCSKEW and fluctuation ratio DUVOL to measure the risk of a stock price crash and control the market situation, and the results confirm that a stock price crash will be contagious in related countries and regions. The innovation of this paper is that it considers the effect of investors' expectations and objective constraints on stock price crash contagion, and verifies the channels and mechanisms of international stock price crash contagion. Overall, we find that investor behavior, including investors' expectations and objective liquidity, is an important micro-mechanism of stock price crash contagion. Therefore, improving the quality of investors can help prevent stock price crash contagion. Moreover, we find that consistent expectations lead to stock price crash contagion. When similar stocks crash, it is difficult for investors to identify whether the crash is an individual risk or an overall risk, and the crash can easily to trigger consistent expectations of an overall crash of related securities. Therefore, improving information transparency in the capital market and reducing the levels of information asymmetry are important methods for preventing stock price crash contagion. In addition, the financial opening up and internationalization of the capital markets may enhance the effects of external stock price crashes. In this context, financial regulation can play a role in preventing stock price crash contagions during crises. Based on these conclusions, academics and regulatory departments should pay attention to the contagion mechanism of stock price crashes, and provide strategies for preventing stock price crash contagion from evolving into systemic financial risk.
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