Lessons from financial crisis contagion simulation in Europe

Abstract

PurposeThe current paper contributes to the vigorous debate about policies and regulations that would shield financial markets' participants from future events of the financial turmoil. In doing so, the paper aims to broaden the picture of the financial crisis contagion and set it against the background of contemporary European markets. The main purpose of this paper is to present novel aspects of the financial crisis contagion, hence clarifying the contagion theory that still remains confusing and ambiguous for both the academics and financial markets' practitioners.Design/methodology/approachThe paper builds on a simulation model for the financial crisis contagion that is rooted in the qualitative query and backed by semi‐structured interviews with financial markets' participants who possess extensive knowledge about the functioning of European markets and their interconnectedness. With this in mind, the current paper adopts an international investor's perspective on implications that stem from the linkages between European financial markets, flawed regulations and the absence of cross‐border monitoring of the financial crisis contagion.FindingsThe findings constitute practical insights into the issues of the financial crisis contagion, hence providing useful advice on policies and regulations that could manage the cross‐market transmission of the financial turmoil and shield financial markets' participants from the episodes of financial crises in the future. The findings reported in this paper also present novel aspects of the contagion processes across the contemporary and systemically important financial markets in Europe.Practical implicationsThe practical implications of the current paper gain in significance as the nascent financial crisis sparked off vigorous debate about the need for implementing regulations that would prevent financial markets' participants from the future episodes of global financial crises. At this point, the findings reported in the current paper might be of interest for policy makers and markets' authorities. In addition, the paper attempts to deliver findings that practitioners associated with the contemporary European financial markets would benefit from by understanding the linkages between these markets and ways the financial contagion spreads. Previously, little knowledge of ways financial crises spread across markets caused substantial losses that were incurred by investors.Originality/valueThe current paper addresses the issues of the financial crisis contagion that belong to the group of the most commonly referenced yet least understood notions in finance. Furthermore, the paper focuses on addressing the recently exposed fragility of financial markets' surveillance and regulations. In doing so, the paper employs a pioneering approach to a simulation of the financial crisis contagion by embarking on a qualitative query rather than empirical data. Henceforth, the limitations of the empirical simulations – experienced in the past studies devoted to investigation of the financial crisis contagion – were ameliorated and the findings presented in the paper became of practical use for the markets' practitioners and policymakers.