Stock market bubbles reduce financial contagion, offering diversification opportunities for investors.
The study looked at how stock market bubbles affect financial contagion between countries. They identified bubble periods in stock markets and used a statistical model to measure contagion. The results showed that during bubble periods, the connection between countries weakens, meaning investors focus more on their own country's opportunities and less on international investments. This decrease in contagion can offer portfolio managers more chances for diversification.