Analysis Of Contagion Research Articles

Analysing contagion and bailout effects with copulae

In this paper, a new methodical framework that combines elements of event studies and copula methodology is proposed in the context of the analysis of bank contagion. Furthermore, to the best knowledge of the author, this paper is the first one to analyse changes in the dependence structure of banks around bailout announcements. The results of the empirical study show that significant contagion effects could be detected both in the German banking sector after the onset of the subprime crisis as well as in the Japanese banking sector in the mid-nineties. I find that announcements of crisis at struggling banks induce a significant increase of lower tail dependence in the banking sector. The analysed bailouts and rescue measures by the central bank proved to be effective in reducing this increased lower tail dependence while increasing tail independence of bank stock returns at the same time. In both data samples, I find that the bailout announcements did not simply restore the pre-crisis dependence structure, but rather only decreased the likelihood of a joint crash of bank stocks without increasing the chances of a joint boom.

Credit Contagion from Counterparty Risk

Standard risk models cannot explain the observed clustering of default, sometimes described as credit This paper provides the first empirical analysis of contagion via direct counterparty effects. We find that bankruptcy announcements cause negative abnormal equity returns and increases in CDS spreads for creditors. In addition, creditors with large exposures are more likely to suffer from financial distress later. This suggests that counterparty risk is a potential additional channel of contagion. Indeed, the fear of counterparty defaults among financial institutions explains the sudden worsening of the crisis after the Lehman bankruptcy in September 2008.

Contagion in Electricity Markets: Does it Exist?

This paper investigates the existence of contagion effects in electricity markets. The concept of contagion has been developed for high frequency financial markets, see the World Bank definition(Word Bank, 2000). Following Pick (2005) and Pesaran - Pick (2007) the paper presents a canonical, econometric model of contagion and investigates the conditions under which contagion can be distinguished from mere interdependence. The theoretical and empirical distinction between contagion and interdependence is based upon precise identification conditions, discussed in the paper. The empirical analysis is based on different regional markets in the Italian Power Exchange (IPX) and we focus only on pure contagion relationship in the IPX at the Italian regional level. This is a novel result in economic literature. The analysis and identification of contagion requires that each individual market equations contains market specific regressors, consequently we have to involve market specific variables in structural equations in order to correctly specify the model. Pesaran - Pick (2007, p. 1266) show that ignoring endogeneity and interdependence can introduce a substantial upward bias in estimation of contagion coefficient. In general, problems of endogeneity requires usage of instrumental variables (IV)estimation and, in agreement with Pick (2005), we obtain consistency by including regional market specific fundamentals. The most important conclusions of this paper are that contagion can be identified separately from interdependence and that effects are asymmetric.

Analysis of Contagion in Emerging Markets

The spread of crises from one country to another, named con- tagion, has been one of the most debated issues in international finance in the last two decades. The presence of contagion can be detected by the increase in conditional correlation during the crisis period compared to the previous period. The paper presents a brief review of three of the most used techniques to estimate conditional correlation: exponential weighted mov- ing average, multivariate GARCH models and factor analysis with stochastic volatility models. These methods are applied to analyze the contagion be- tween the stock market of three major Latin American economies (Brazil, Mexico and Argentina) and two emerging markets (Malaysia and Russia). The data cover the period from 09/05/1995 to 12/30/2004, which includes several crises. In general, the three methods yielded similar results, but there is no general agreement. All the methods agreed that the contagion occurred mostly during the Asian crisis.

Dynamic correlation analysis of financial contagion: Evidence from Asian markets

We apply a dynamic conditional-correlation model to nine Asian daily stock-return data series from 1990 to 2003. The empirical evidence confirms a contagion effect. By analyzing the correlation-coefficient series, we identify two phases of the Asian crisis. The first shows an increase in correlation (contagion); the second shows a continued high correlation (herding). Statistical analysis of the correlation coefficients also finds a shift in variance during the crisis period, casting doubt on the benefit of international portfolio diversification. Evidence shows that international sovereign credit-rating agencies play a significant role in shaping the structure of dynamic correlations in the Asian markets.

Analysis of Contagion in Emerging Markets

The spread of crises from one country to another, named “contagion”, has been one of the most debated issues in international finance in the last two decades. The presence of contagion can be detected by the increase in conditional correlation during the crisis period compared to the previous period. The paper presents a brief review of three of the most used techniques to estimate conditional correlation: exponential weighted moving average, multivariate GARCH models and factor analysis with stochastic volatility models. These methods are applied to analyze the contagion between the stock market of three major Latin American economies (Brazil, Mexico and Argentina) and two emerging markets (Malaysia and Russia) The data cover the period from 09/05/1995 to 12/30/2004, which includes several crises. In general, the three methods yielded similar results, but there is no general agreement. All the methods agreed that the contagion occurred mostly during the Asian crisis.

Econometric issues in the analysis of contagion

This paper presents a canonical, econometric model of contagion and investigates the conditions under which contagion can be distinguished from interdependence. In a two-market set-up it is shown that for a range of fundamentals the solution is not unique, and for sufficiently large values of the contagion coefficients it has interesting bifurcation properties with bimodal density functions. The identification of contagion requires that the equations for the individual markets contain market specific regressors. This sheds doubt on the general validity of the correlation-based tests of contagion recently proposed in the literature which do not involve any market specific variables. Furthermore, we show that ignoring endogeneity and interdependence can introduce an upward bias in the estimate of the contagion coefficient, and using Monte Carlo experiments we further show that this bias could be substantial. Finally, we analyse data on European interest rate spreads during the ERM and find a clear asymmetry in the contagion effects of sharp rises and falls; with only the former having some statistically significant effects.

Coexceedances in financial markets—a quantile regression analysis of contagion

This article introduces a new model to analyze financial contagion based on a modified coexceedance measure. We use the quantile regression framework to examine the occurrences and the degrees of coexceedances. Contagion is defined as the crisis-specific coexceedance not explained by the covariates for different quantiles. Our approach can identify the extent of contagion and also reveal linear and non-linear linkages between contagion and its determinants. Estimation results for daily stock index returns show that “some” contagion exists and is predictable within and across regions. Furthermore, contagion depends on a regional (world) market return and its volatility and is stronger for extreme negative returns than for extreme positive returns. An analysis of the evolution of coexceedances additionally reveals clusters of extremes. Finally, the computation of conditional densities shows the impact of different influence factors on the entire conditional distribution of coexceedances.

Coexceedances in Financial Markets - A Quantile Regression Analysis of Contagion

This paper analyzes simultaneous exceedances (coexceedances) of several stock index returns for different thresholds with a focus on the Asian crisis in 1997. We introduce a new concept of computing and estimating time-varying coexceedances and use the quantile regression model to analyze contagion. We find contagion (i.e. more and larger coexceedances) during the Asian crisis among countries and also across regions. The results are based on a comparison of coexceedances of the full period to a benchmark period conditional on certain regimes of extreme market movements. An analysis of the evolution of coexceedances also reveals the time-varying character of contagion. Conditional density estimates additionally point to the existence of multiple equilibria in crisis periods.

Financial Integration and Systemic Risk

Recent empirical studies criticize the sluggish financial integration in the euro area and find that only interbank money markets are fully integrated so far. This paper studies the optimal regional and/or sectoral integration of financial systems given that integration is restricted to the interbank market. Based on Allen and Gale (2000)'s seminal analysis of financial contagion we derive the interbank market structure that maximizes consumers' ex-ante expected utility, i.e. that optimizes the trade-off between the contagion and the diversification effect. We analyze the impact of various structural parameters including the underlying stochastic structure on this trade-off. In addition we derive the efficient design of the interbank market that allows for a cross-regional risk sharing between banks. We also provide a measure for the efficiency losses that result if financial integration is limited to an integration of the interbank market.

Econometric Issues in the Analysis of Contagion

This paper presents a canonical, econometric model of contagion and investigates the conditions under which contagion can be distinguished from inter-dependence. In a two-country (market) setup it is shown that for a range of fundamentals the solution is not unique, and for sufficiently large values of the contagion coefficients it has interesting bifurcation properties with bimodal density functions. The extension of the model to herding behaviour is also briefly discussed. To identify contagion effects in the presence of inter-dependencies the equations for the individual markets or countries must contain country (market) specific forcing variables. This sheds doubt on the general validity of the correlation-based tests of contagions recently proposed in the literature which do not involve any country (market) specific fundamentals. Finally, we show that ignoring inter-dependence can introduce an upward bias in the estimate of the contagion coefficient, and using Monte Carlo experiments we further show that this bias could be substantial.

A Dynamic Factor Analysis of Financial Contagion in Asia

In this paper we compared the performance of country speci…c and regional indicators of reserve adequacy in predicting, out of sample,

An analysis of contagion and competitive effects at commercial banks

We examine whether an adverse event at one bank generates externalities for the banking industry, and assess whether the population of commercial banks is homogeneous. We find dividend reductions are negative events for both announcing money center and regional banks, but only reductions at money center banks have negative, contagion-type externalities. Dividend reductions at regional banks have positive competitive effects on geographic rivals. Regulatory enforcement actions induce negative valuation effects that are idiosyncratic to targeted banks, but actions against regional banks generate positive competitive effects on geographic rivals. Our evidence suggests that regional banking markets are not contestable.