The subprime mortgage crisis is an ongoing economic problem manifesting itself through liquidity issues in the banking system owing to foreclosures which accelerated in the United States in late 2006 and triggered a global financial crisis during 2007 and 2008. Crisis has caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value". The IMF has even warned in April 2008 that America`s mortgage crisis has spiraled into "the largest financial shock since the Great Depression" and there is now a one-in-four chance of a full-blown global recession over the next 12 months.
Based on the above concern, this paper tests the integrity of crisis contagion effect from US on China stock market. First we notice the abnormal signal in the stock indices daily return in China market after the crisis eruption. Then, we suppose a linkage between China stock indices fluctuation with the US financial crisis and support our assumption by taking several statistical approach. After the true contagion effect is build, we make a log linear model to decompose the general contagion effect into different channel factors, trying to find the most important role in the contagion mechanism in order to give some hints to the macro economy authority for the efficient rescue measure selection.
