Crisis Transmission Research Articles

Calm Before the Storm: An Early Warning Approach Before and During the COVID-19 Crisis

This paper develops a means of visualising the vulnerability of complex systems of financial interactions resulting from the changing risk tolerance of investors. The investors' risk behavior contributes to the buildup of vulnerability in crisis and in calm periods. We show how both time-varying risk tolerance and spillover indices can be translated into two-dimensional information transmission and crisis transmission maps, respectively. Taken together, the information transmission maps have the advantage of highlighting potential crisis transmission pathways in the crisis transmission maps. These maps provide clear visualization showing information transmission predates crisis transmission drawing from conditional signed spillover and risk tolerance indices computed from equity market data for 31 global markets between 1998 and 2020. We examine if investors' risk preference induces a crisis and to what extent such a predictor may be related to a pandemic. Furthermore, we take a special look at the COVID-19 pandemic and its impact on the dynamics of systemic crisis transmission.

The Transmission of Economic Shocks in Multi-Divisional Firms: A Capabilities-Based View

This study develops a capabilities-based perspective on resource allocation by examining the influence of parent- and division-level capabilities on the transmission of economic shocks in multi-divisional firms. We begin by arguing that the effects of parent-specific crises spread to divisions, resulting in significantly reduced asset growth in these divisions compared to divisions for which the parent is not exposed to a crisis. We contend, however, that differences in experience levels across firms, both at the parent and division levels, lead to heterogeneity in capabilities, and these capabilities attenuate the transmission of economic crises. This is because parents with greater capabilities should be less exposed to economic shocks, while divisions with greater capabilities may be less dependent on parent resources. Analyses of panel data on 2,051 foreign divisions of global retailers provides evidence supportive of our arguments: financial crises in parent home countries negatively affect division-level investment, and this effect is attenuated by greater experience of parents, focal divisions, and sister divisions in the same geographic market. Overall, our work provides new insights into how capabilities at multiple corporate levels can influence resource allocation and the exposure of divisions to parent-level shocks.

The prediction of financial crisis in Indonesia based on the smoothed probability value from the combination of volatility and Markov switching models

Indonesia is a country that applies an open economic system. The application of an open economic system can lead to the transmission of crises from other countries, for example the major financial crisis that experienced by Indonesia in 1997 and 2008. The financial crisis caused disruption to the economy stability of the country itself, so it is necessary to predict the financial crisis with the aim to protect economy stability. The indicators used in this research are the Indonesia Composite Index (ICI) and foreign exchange reserves. The method used is a combination of volatility and Markov switching models, namely the MS-ARCH(2,1) for ICI indicator and MS-GARCH(2,1,1) for foreign exchange reserves indicator. The result showed that based on the smoothed probability value of the combination of those two models, the ICI indicator could explain the crisis that occurred in 1997 and 2008, while the foreign exchange reserves indicator could only explain the crisis that occurred in 1997. In addition, the results of financial crisis prediction in Indonesia show that Indonesia will not experience a financial crisis for the next year. However, if the ICI and foreign exchange reserves indicators decrease by at least 32%, a crisis can occur.

How Crisis Contagiously Spreads Across Markets?

The past twelve years were punctuated by increasingly complex dynamics of the cross-market interdependence and two ``once-in-100-year'' global financial crises, including the 2020 financial contagion through increased physical contagion during the COVID-19 pandemic. This paper develops a non-linear financial contagion network via a dynamic mixture copula-EVT (extreme value theory) model to quantitatively detect and measure the complex nature of financial contagion. Considering the crisis transmission from both macroeconomic fundamentals and investor constraint perspectives, we identify and investigate the dynamics of transmission channels for both 2008 and 2020 financial crises. More specifically, we explore the wealth effect and portfolio rebalancing through the asymmetric tail contagion channels across 22 major emerging and developed stock markets and compare the differences between the two major crises. Moreover, motivated by the V-shape rebound in these two crises, we examine and find evidence that the transmission channels between the market melt-down and melt-up periods are different. Our findings shed new light on the dynamics of crisis transmission mechanisms across countries and provide important implications for international investors and policymakers.

Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects

We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997-2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.

Shock Transmission Through Cross-Border Bank Lending: Credit and Real Effects

Abstract We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997–2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.

Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects

We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997-2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.

Crises boursières et sentiment de l’investisseur: Cas de la Bourse de Tunis

T The emergence of a new current of research, behavioral finance, linking market behavior and human psychology, aims to study the cognitive biases related to investor behavior that are not explained by the traditional theory of finance. Our empirical study focuses, firstly, on the identification of the stock market crises that affected the Tunis Stock Exchange during the period from 1998 to 2018 and, secondly, on the measure of investor sentiment in the Tunisian market. We check that the indicator of sentiment of the investor agrees with the stock market crises and we find that the sentiment of the investor causes the Tunisian stock market crises in the sense of Granger. Hence, new proof is made of the important role played by investors in the transmission of stock market crises.

Global Banking, Trade, and the International Transmission of the Great Recession

Abstract We employ a dynamic stochastic general equilibrium model to investigate the transmission of the global financial crisis via the collapse of export demand (trade channel) and through losses on cross-border asset holdings (financial channel). Calibrated to German data, the model predicts the trade channel to be twice as important as the financial channel. In the United Kingdom, the latter dominates due to higher foreign-asset holdings, which, at the same time, serve as an automatic stabiliser in case of plummeting foreign demand. The financial channel leads to much longer-lasting effects. Stricter enforcement of bank capital requirements would have frontloaded the recession.

Global financial economic crisis transmission on the transition economy

PurposeThe global financial crisis hit the economy of the Kyrgyz Republic by the third wave of its transmission in early 2009. The purpose of this study is to examine the impact of the global financial economic crisis on the transition economy of the Kyrgyz Republic. As there is a low level of the Kyrgyz Republic’s integration into the global financial and economic processes, it is obvious that channels of transmissions are different.Design/methodology/approachThe empirical model is the vector autoregression approach. The quarterly data from 2005 to 2013 of the remittances from abroad, trade volumes, exchange rates, credits, deposits and liquidity of the banking system, gross domestic product (GDP) and foreign direct investment (FDI) were used in the empirical analysis.FindingsThe authors found a significant positive relation between transmission channels such as remittances flow, banking sector, international trade and GDP within the first six months. Thus, a decline in the aforementioned variables has a significant affirmative effect on the country’s GDP. Notwithstanding, the exchange-rate channel adversely influences GDP. Thereby, the depreciation of the national currency leads to an increase in GDP.Originality/valueThe study findings allow the Kyrgyz policymakers to foresee the global crisis transmission through the primary channels of transmission mechanism. Nevertheless, a decrease of the deposit level by 1 per cent leads to 2.91 per cent decline in FDI inflows. On the contrary, an increase of the exchange rate by 1 per cent leads to 1.54 per cent decrease in imports.

Economic Cycle Born in the Market Pricing System: Income Distribution，Price Stratification and Advanced Consumption

The neo-classic liberalism economics tends to owe the economic cycle to the exogenous shock from money or physical objects, so as to overcome the economic crisis through the prevention of external shocks. In particular, the Austria School attributes the economic cycle to credit expansion led by the government based on the transmission mechanism of interest rate, so as to put forward the proposition that currency issuance should not be nationalized, which has become the most popular concept nowadays. Here, the Austrian School takes interest rate as the transmission mechanism, which leads to the change of the production structure, and then out of touch with consumption. However, this paper holds that the basic mechanism of guiding consumption and production is price but not interest rate, and then the changes of production and consumption with credit are analyzed from the perspective of the market pricing system, which clearly reveals that the economic cycle or the economic crisis is born in the market economy from the market pricing system. The basic analysis logic of this paper is that: （1） The Matthew effect of the market will inevitably lead to the widening of income gap, and the purchasing power determined by income causes the hierarchical price of different grade products. （2） Correspondingly, not only the rich people prefer the consumption of advanced products, but also the social mass has a universal preconsumption under the guidance of producer sovereignty, and all of which will stimulate manufacturers to produce and invest the advanced products. （3） As a result, there is to occur asymmetric between the consumption structure and the income structure in the market economy, and which causes the disconnection between the consumption level and economy development as well as the industrial structure being out of the actual level of economy development. （4） Furthermore, with the help of the credit system and credit expansion, there is more significant price stratification in the boom period than that in the depression period, and which makes the social production especially the production of high-grade products significantly surpass the actual level of economy development and the level of consumption demand. （5） However, the oversupplied advanced products is very vulnerable to the demand impact from economic fluctuations, and which will lead the sinking of capital investment, the idling of capacity as well as the bankruptcy of the related enterprises, so as to lead to the economic crisis.By systematically analyzing the origin, transmission, intensification and triggering factors of the economic crisis, this paper draws the following conclusions: What the cyclical expansion and constriction of credit is mainly due to is not the government’s improper policies but the merchant’s impulse of pursuing profits. Moreover, the expansion and constriction of credit only plays a role in fuelling and intensifying the economic crisis. In other words, the economic crisis is more rooted in the market economy system than in exogenous shocks. Just because the economic crisis cannot be avoided in the pure market economy, this paper gives such a policy implication: to alleviate and avoid the economic crisis, we should not let the market run freely at all, but amend and perfect the market mechanism, and the most important thing is the supervision and restriction of the tournament pricing system to avoid the trend of social income stratification, so as to establish and improve the self-discipline market mechanism.

Countries of former yugoslavia: Periphery vs. super-periphery in the great recession and beyond

The paper deals with the performance of former Yugoslav countries during the Great Recession. It compares the performance of peripheral countries (Slovenia and Croatia) with those of superperipheral countries (Bosnia, the Republic of North Macedonia, Montenegro, and Serbia). The focus of the analysis is the four channels of crisis transmission and amplification: the capital surge as the external channel on the one hand, and the financial accelerator, the banking credit extension, and liquidity as internal channels on the other. While the external channel drove the dynamics of the crisis, the internal channels amplified, broadened, and prolonged its drastic economic consequences. The paper depicts the trajectory of the consequences of the Great Recession for both peripheral and super-peripheral countries. It shows that, regarding financial stability, peripheral countries outperformed superperipheral countries in the boom phase, but not in the bust and recovery phases. The crucial factor influencing such a deterioration of peripheral countries? financial stability was the policy measures enforced by the European Commission and ECB, calibrated to the needs of the largest and strongest economies of the euro area, while neglecting the asymmetric dynamics of European economies in the bust and recovery phases. The paper concludes with a warning that something similar could happen in the present crisis triggered by the Covid-19 virus.

Currency Crisis Transmission Through Trade Channel Asian and Mexican Crises Revisited

This paper provides support to the existing empirical evidence that trade linkages play an important role in explaining the magnitude of currency...

The eurozone target-system from the perspective of Portugal

Payment systems make a significant contribution to the flow of transactions and financial stability. In this paper, we start by applying the principles of the gravity model to explain the TARGET flows of banking transactions between Portugal and other eurozone countries. The main explanatory variables tested are a composite indicator of economic and financial activities, distance, membership of the Eurozone (EZ), and country risk measured by treasury bond yields. The results indicate that Portugal has a high level of integration in the European banking market as distance is not statistically significant, and that the membership of the EZ facilitates the financing of the economy. The economic size of the partner country becomes non-significant after controlling for country fixed effects. The increase in the Portuguese country risk during the European sovereign debt crisis led to a marked decline in external financing, indicating that this is an important channel of transmission of crises.

Simulation analysis of the spread of a supply crisis based on the global natural graphite trade network

In recent years, the application potential of graphite materials in new energy and new materials has gradually developed. Thus, graphite has become increasingly regarded as a necessary strategic resource for the development of new energy and has gradually been considered seriously by various countries. However, at present, an imbalance between the increased demand and tighter supply of graphite resources is very likely to lead to a supply crisis for graphite. To understand the transmission process and impact of this supply crisis in various countries and to identify countries with important statuses in the graphite trade, in this paper, we construct the global natural graphite trade network. We set each country as a source of crisis transmission. Then, a computer is used to simulate the spread of the crisis through a cascade failure process, and the influence of these source points is analyzed in the real network. The results show that China, the United States, Germany, and India, have larger impacts. Moreover, the scope of influence of a country is related to its region of the country in addition to its GDP and its export volume. Second, the entire cascade propagation process emerges with the diffusion characteristics with which it first begin to spread in the same region. Most of the directly infected countries are in the same region as the initial outbreak country. In addition, by simulating the changes in the avalanche size when China's graphite export volume declines by varying degrees, we find that China has a strong impact, and a small reduction in its export volume can affect the graphite trade in certain countries. Finally, based on differences in resource endowment, economic strength and the consumption in different countries, relevant policy suggestions are proposed for different countries.

Sovereign bond market dependencies and crisis transmission around the eurozone debt crisis: a dynamic copula approach

ABSTRACTWe examine the dependency between the European government bond markets around the recent sovereign debt crisis. A dynamic copula approach is used to model the time-varying dependence structure of those government bond markets, evaluate the nature and strength of their dependencies over time, and gauge the transmission of the crisis shocks. Our results can be summarized as follows: i) the eurozone sovereign bond markets under consideration have a significant and positive dependence with the Greek and the EMU benchmark sovereign bond markets; ii) the dynamic-BB7 copula function best describes the dependence structure between these sovereign bond markets and provides evidence of asymmetric tail dependence; iii) the conditional probability of crisis transmission from Greece to other eurozone countries is higher than the other way around; and iv) Greece is the most vulnerable country when the eurozone entered into the sovereign debt crisis.

Diffusion of crisis signals across the world: evidence from subprime crisis of 2008-2009

PurposeThe innovations in fundamentals coupled with noise traders induce co-movement in diverse markets. This co-movement in equity markets which is evidenced higher during the turmoil period influences economic fundamentals of a country dissimilar in nature. The purpose of this paper is to examine whether economic fundamentals or investors’ behavior attributable to disturbances across the world are the rationale behind the crisis transmission, and thereby distinguish fundamental-based contagion from investor-induced contagion.Design/methodology/approachInitially, the study investigates the role of macroeconomic fundamentals and stock returns on crisis occurrence using panel probit estimates. Additionally, ordinary least squares estimates controlling the influence of fundamentals on domestic return capture the discrete country effect measuring the influence of domestic as well as foreign economic fundamentals along with foreign returns on the domestic stock index.FindingsThe empirical results reveal that foreign country stock index returns are having a significant influence on domestic returns besides a prominent role in crisis occurrence. The binary probit model confirmed the influence of both macroeconomic factors and foreign returns in crisis occurrence. The OLS estimates found evidence for investor-induced contagion in the crisis period where the effects of economic fundamentals are small in comparison to foreign market returns that are mainly dominant in pre- and post-crisis period.Research limitations/implicationsThe propagation of crisis from one market to other would enable the policy makers to make clear regulations at right time to control for the crisis in future. The results can help the policy makers as well as investors in reducing the impact of the crisis in future by clearly monitoring the behavior of the factors under study.Originality/valueThe current study addresses the role of macro fundamentals and investors influence in crisis propagation. Adopting subprime crisis of 2008-2009 as a reference point and separating the sample period into pre-crisis, crisis and post-crisis period, the study explains how badly the other 30 markets impacted the crisis that emerged in the USA.

Interbank markets and bank bailout policies amid a sovereign debt crisis

Interbank markets have been at the core of the international transmission of recent financial crises, including the euro area sovereign debt crisis. This paper studies the transmission of shocks in a two-country DSGE model where government bonds are used as collateral in interbank markets. We isolate an “interbank collateral channel” of transmission, which works through banks portfolio allocation between loans and government bonds, the resulting value of banks bond holdings and the tightness of collateral constraints in the interbank market. We find that, while in some scenarios this channel compounds a “bank net worth channel” in amplifying negative shocks, in other scenarios the “interbank collateral channel” can mitigate the effects of shocks. Bank bailout policies financed by government debt can erode this stabilizing effect.

Risk prediction and evaluation of transnational transmission of financial crisis based on complex network

In this paper, the transmission characteristics of financial crisis in stock market are studied based on complex network. The influences factor and propagation model of financial crisis in international stock market are qualitatively analyzed through comprehensive application of the qualitative and quantitative analysis method by taking complex network and communication theory of financial crisis as theoretical basis. Meanwhile, the transmission mechanism, measurement of transmission effect, transmission path and immunization strategy of financial crisis in stock market network are empirically analyzed.

Foreign Exchange Market Contagion in Central Europe from the Viewpoint of Extreme Value Theory

This paper examines contagion in the foreign exchange markets of three Central European countries and the euro area. Contagion is viewed as the occurrence of extreme events taking place in different countries simultaneously and is assessed with a measure of asymptotic tail dependence among the studied distributions. Currency crisis contagion is one strand of this research. However, the main aim of the paper is to examine the potential of bubble contagion. To this end the representative exchange rates are linked to their fundamentals using a cointegration approach. Given the long-time range required by cointegration testing, the variables are first tested for unit roots with structural breaks, whose existence is supported by these tests. In the sequel, the extreme values of the differences between actual daily exchange rates and their monthly equilibrium values determine the episodes associated with large departures from equilibrium. Using tools from Extreme Value Theory, we analyse the transmission of both standard crisis and bubble formation events in the examined currency markets. The results reveal a significant potential for contagion in the currency markets of Central Europe.