Abstract: Under the background of the deepening of the global financial integration, financial crisis erupted more and more frequently since the 1980. Thus, measuring the integration of financial markets within a country or across national borders has been a subject of keen interest in financial economics. In measuring financial contagion a number of methodological approaches have been utilized in the past, mainly focusing on the test of financial contagion effect. There is little literature from the micro-perspective of the behavior of traders to explore the financial crisis of the infection mechanism.
In this paper, an empirical asset pricing model inspired by the heterogeneous agents literature, a market with time-variation in the source of price changes, is proposed in order to look at the contagion question from a different perspective. By doing so, we attempt to lay bare the micro-mechanisms behind the changing mutual dependency between asset markets. Changes in asset prices are driven by three different sources:fundamentalists, chartists, and internationalists. The relative importance of each source is time-varying conditional on its impact on price in the previous period. The notion of contagion is incorporated by modelling two markets next to each other; the fact that the domestic market is (partly) driven by information from the foreign market introduces conditional interaction between the two risky assets. The model reduces to a VECM with time-varying coefficients and an economic underpinning. This time-variation is induced by the fact that the weight put on the different sources changes through time.
The model is estimated for the U.S and Hongkong stock markets monthly data surrounding the 2007 subprime crisis and 2010 European debt crisis. Results imply that the U.S stock market is dominate by fundamentalists in most of the time, but during the crisis period, the influence of internationalist is raising apparently; for Hongkong stock market, chartist is the main source of price changes, the attention for foreign markets is increasing during the crisis period. However, there is no clear evidence of fundamentalists for price changing.
The combination of shift-contagion and heterogeneous agents has never been explored, to our best knowledge.Thus our study provides a new perspective and analytical tool for understanding the process of financial crisis contagion. Future research in this field can spread into different directions. The dual market situation is examined in this paper. Our research can be explored to a multi-markets setting for future study.

Key words: financial crisis contagion, international traders, regime-switching, heterogeneous trading strategy