Tracing Financial Contagion: A Principal Component Analysis of Interconnected Stock Markets (2009–2024)

Abstract This research takes a closer look at the concept of financial contagion, which is all about how market disruptions can ripple across borders, particularly during significant global crises from 2009 to 2024. We employed Principal Component Analysis (PCA), a statistical technique that helps us identify patterns by breaking down complex data, to examine daily return data from four major equity markets: India’s NSE, the Hong Kong Stock Exchange, Japan’s Nikkei 225, and the U.S. Dow Jones Industrial Average. Our results indicate that these markets are becoming more influenced by common systemic factors, highlighting their increasing interconnectedness over time. Importantly, major global events like the European debt crisis, the COVID-19 pandemic, and the conflict between Russia and Ukraine have triggered synchronized movements across these indices, providing compelling evidence of contagion effects (Forbes & Rigobon, 2002; Bekaert et al., 2014).