Channels Of Financial Contagion Research Articles

Финансовое заражение российских компаний от рынка нефти под воздействием санкционного и пандемического шока

The article presents an overview of theoretical approaches to the study of the content and channels of financial contagion, the main methods and models of its quantitative analysis. The results of contemporary domestic and foreign studies devoted to the assessment of the intensity, direction and scale of contagion across countries and industries are discussed. We conclude that Russian researchers pay insufficient attention to this problem. In the practical part of the article, we test hypotheses about the transmission of contagion from the oil market to a number of Russian large companies belonging to different sectors of the economy. Sanctions and pandemic shocks are seen as external triggers for contagion. We use a large amount of oil and stock price data for a period that includes the 2014–2016 monetary and financial crisis and the 2020 pandemic crisis. To distinguish between periods of high and low market volatility, which is necessary to detect contagion, we calculate moving coefficients of variation for oil and stock prices. To identify cases of contagion, we employ the Forbes-Rigobon test, tests for coasymmetry and cocurtosis of distribution. The resulting estimates confirm numerous cases of contagion, with their number increasing as higher distribution moments are analysed. In addition, we conclude that during the 2014–2016 crisis, the Russian oil and gas industry showed the greatest vulnerability to contagion from the oil market. However, the pandemic shock changed the telecommunications sector turned out to be the most susceptible to contagion from the oil market in Russia. The banking sector in both crises showed a high degree of contagion from the oil market. At the same time, companies associated with ferrous and non-ferrous metallurgy, mining and processing of precious metals, as well as the chemical industry demonstrated the greatest resistance to financial contagion.

Interconnected banks and systemically important exposures

We study the impact of the interplay between the structure of the financial network and market conditions on financial stability in the European banking system. We capture two channels of financial contagion. The first channel concerns direct interconnectedness, via a network of interbank loans, banks’ loans to other corporate and retail clients, and securities holdings. The second channel concerns indirect interconnectedness, via overlapping exposures to common asset classes. To assess the impact of contagion, we apply the structural valuation model NEVA, in which common shocks to banks’ external assets are reflected in a consistent way in the market value of banks’ mutual liabilities through the network of obligations. Applying the model to a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area we identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. We also demonstrate the potential for contagion effects to amplify first-round stress test results due to interconnectedness. Finally, we provide insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to policy discussions about international risk sharing, for instance, in the context of the EU Capital Market Union.

Cross-sectoral interactions in Islamic equity markets

Although it is essential for investors who want to comply with their religious obligations, cross-sectoral interaction in Islamic equity markets is an untouched subject in finance literature. Accordingly, this paper aims to investigate the interactions between the ten major sectors of Islamic equity markets by implementing the novel methodologies of dynamic conditional correlation (DCC) and dynamic equicorrelation (DECO) on Dow Jones Islamic Market sector indexes. We show that prior to the financialization period, firm fundamentals and real economic factors had an important role in driving the Islamic equity prices, however this role seemed to weaken in the last decade with the global financialization, leading to highly integrated Islamic equity sectors just as in the case of the conventional financial sectors. Moreover, this effect is emphasized further through financial contagion channels in the recent global financial crisis. Our findings thus suggest that Islamic equity indexes are also prone to global shocks hitting the world financial system, and investors should be cautious in interpreting and forecasting the interaction structure between Islamic equity sectors. Furthermore, our results do not support the decoupling hypothesis of the Islamic equity markets from the conventional financial system.

Contagion of the Global Financial Crisis and the real economy: A regional analysis

This paper investigates the contagion effects of the Global Financial Crisis (2007–2009) by examining ten sectors in six developed and emerging regions during different phases of the crisis. The analysis tests different channels of financial contagion across regions and real economy sectors by utilizing dynamic conditional correlation from the multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) model. Evidence shows that the GFC can be characterized by contagion effects across regional stock markets and regional financial and non-financial sectors.However, Developed Pacific region and some sectors in particular Consumer Goods, Healthcare and Technology across all regions seem to be less affected by the crisis, while the most vulnerable sectors are observed in the emerging Asian and European regions. Further, the analysis on a crisis phase level indicates that the most severe contagion effects exist after the failure of Lehman Brothers limiting the effectiveness of portfolio diversification.

Financial Contagion and Lehman Brothers’ Bankruptcy

The bankruptcy of Lehman Brothers provides a unique opportunity to distinguish between two financial contagion channels, common factors or counterparty exposures. We examine three groups of firms, (1) firms making voluntary disclosures of their exposure to Lehman, (2) firms making voluntary disclosures of no exposure to Lehman and (3) firms with claims against Lehman that were not initially disclosed. Firms disclosing material exposures to Lehman suffer large negative industry-adjusted abnormal stock returns around their disclosure announcement, demonstrating that counterparty risk is a significant channel of financial contagion. We also find wide differences in disclosures decisions; these do not seem driven by concerns for litigation or reputation but rather by concerns about contagion. In terms of policy implications, these results support the view that allowing the failure of large financial institutions can have far-reaching effects on other firms and that regulators should have a better understanding of interconnections in the financial system.

Third-person Effect and Financial Contagion in the Context of a Global Game

In this paper we present a psychological channel of financial contagion. We incorporate this new channel of financial contagion in the global game. Our basic assumption is that agents are overestimating the influence of negative messages they ascribe to others, and are thus acting on the basis of this perception. We resort to the psychological studies on the so-called third-person effect to justify this assumption. We show that the third-person effect is rationalizable. Our model has the feature that a crisis in a foreign country can be transmitted to the domestic country, even though there has been no changes in domestic fundamentals. Our model also provides intuitive explanations to the empirical observations that many governments have lost in a confidence game in the past crisis episodes.

Financial contagion and the real economy

This paper studies the spread of the Global Financial Crisis of 2007–2009 from the financial sector to the real economy by examining ten sectors in 25 major developed and emerging stock markets. The analysis tests different channels of financial contagion across countries and sectors and finds that the crisis led to an increased co-movement of returns among financial sector stocks across countries and between financial sector stocks and real economy stocks. The results demonstrate that no country and sector was immune to the adverse effects of the crisis limiting the effectiveness of portfolio diversification. However, there is clear evidence that some sectors in particular Healthcare, Telecommunications and Technology were less severely affected by the crisis.

Financial Contagion Channels: Market Microstructure Evidence from Lehman Brothers’ Bankruptcy

The largely unanticipated bankruptcy of Lehman Brothers and firms’ voluntary disclosures of their exposures to Lehman in the aftermath of the bankruptcy provide a clean laboratory to test counterparty risk contagion, information transmission channel and other competing contagion theories. Using market microstructure variables that measure trading activities including number of trade, trade size, and trade volume, and liquidity conditions including transaction cost, price impact of trade, adverse selection cost, and buy-sell order imbalance, we thoroughly examine negative consequences of contagion effects. Overall, the evidence supports the dominant role for the counterparty contagion hypothesis – firms with exposure to Lehman suffered severe negative effects measured by greater price impact, information asymmetry, selling pressure and negative returns. The evidence on the information transmission hypothesis is mixed – firms that announced that they had no exposure to Lehman also experienced increase in transaction cost, but no significant increase in price impact, information asymmetry and selling pressure. We find no consistent evidence supporting the ‘flight to quality’ or ‘flight from liquidity’ hypotheses as contagion channels.

Financial Contagion Through Bank Deleveraging: Stylized Facts and Simulations Applied to the Financial Crisis

The financial crisis has highlighted the importance of various channels of financial contagion across countries. This paper first presents stylized facts of international banking activities during the crisis. It then describes a simple model of financial contagion based on bank balance sheet identities and behavioral assumptions of deleveraging. Cascade effects can be triggered by bank losses or contractions of interbank lending activities. As a result of shocks on assets or on liabilities of banks, a global deleveraging of international banking activities can occur. Simple simulations are presented to illustrate the use of the model and the relative importance of contagion channels, relying on bank losses of advanced countries’ banking systems during the financial crisis to calibrate the shock. The outcome of the simulations is compared with the deleveraging observed during the crisis suggesting that leverage is a major determinant of financial contagion.

Channels of financial market contagion

This study aims to fill a gap in the current literature by determining which channels of financial contagion are the most significant in transmitting crises between countries. Initial results, using χ2 contingency tables, indicate that there is a significant relationship between contagion and the inflation rate and between contagion and financial liquidity. A simultaneous comparison of the channels is then performed using a series of best subset logit regressions. These suggest that a combination of high inflation and an emerging market classification form the most significant subset in increasing the probability of a contagious event.

A brief description of the FRB MODELEASY/FEDEASY econometric language

We study the impact of the interplay between the structure of the financial network and market conditions on financial stability in the European banking system. We capture two channels of financial contagion. The first channel concerns direct interconnectedness, via a network of interbank loans, banks’ loans to other corporate and retail clients, and securities holdings. The second channel concerns indirect interconnectedness, via overlapping exposures to common asset classes. To assess the impact of contagion, we apply the structural valuation model NEVA, in which common shocks to banks’ external assets are reflected in a consistent way in the market value of banks’ mutual liabilities through the network of obligations. Applying the model to a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area we identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. We also demonstrate the potential for contagion effects to amplify first-round stress test results due to interconnectedness. Finally, we provide insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to policy discussions about international risk sharing, for instance, in the context of the EU Capital Market Union.