Evidence Of Financial Contagion Research Articles

Contagion Effects on Financial Markets Risk

Financial contagion represents a very controversial concept in international finance being one of the most frequently referenced subjects and yet least understood. The literature highlights that shocks and crises can spillover from a country to others through various channels. Although it is hard to determine exactly the cause and channel that lead to the transmission of the initial shock, it is more than clear that these events are encouraged when economies are integrated or in the process of global integration. The core of this study is to capture evidence of financial contagion based on a sample of daily closing prices from 17 different market indices, for the period January 1st, 2007 – October 15th, 2021. We employed the shortfall method for estimating the risk and we built a model within the framework of Bayesian Neural Networks (BNN). Given the results, evidence of contagion was sensed between some of the 17 markets within the sample, however the causality between them differed from the full sample period to the sub-samples periods. Nevertheless, we found that for the sub-sample corresponding to January 1st, 2020 – October 15th, 2021, period that encompasses the global exogenous shock triggered by the COVID-19 pandemic that appeared in Romania at the beginning of 2020, the relationships between global markets were decoupled, contagion being sensed mostly regionally, at the level of the European countries.

Financial Contagion and the Wealth Effect: An Experimental Study

We design a laboratory experiment to test the importance of wealth as a channel for financial contagion across markets with unrelated fundamentals. In a sequential global game, we analyze the decisions of a group of investors that hold assets in two markets. We consider two treatments that vary the level of diversification of these assets across markets. In both treatments, we nd evidence of financial contagion. When investors have completely diver- si ed portfolios, we provide evidence of contagion due to a wealth effect: for certain ranges of fundamentals, we show that a decrease in wealth from the investment in the first mar- ket makes withdrawals more likely in the second, thereby increasing the probability of a crisis. When portfolio diversification is small, then social imitation is relevant in explaining contagion.

Unraveling the Financial Contagion in European Stock Markets During Financial Crises: Multi-Timescale Analysis

ABSRACTThe article investigates the evidence of financial contagion and market integration in selected European equity markets during nine major crises across regions. The focus is to identify whether (i) contagion evidence is pure or fundamental and (ii) dynamic evolution of integration is in the short run or long run. Wavelet decomposition in both its discrete and continuous forms is used. The findings reveal the following: (i) prior to the subprime crisis, contagion effects generated short-term shocks. The most recent US subprime crisis, however, reveals the evidence of fundamental based contagion. (ii) We find increasing short-run and long-run stock market integration, driven by several stages of the establishment of Economic and Monetary Union (EMU), questioning the ultimate benefits of formal entry into EMU membership.

Spillover effect in Asian financial markets: A VAR-structural GARCH analysis

Purpose – The purpose of this paper is to provide a method for computing the spillover index first proposed by Diebold and Yilmaz (2009), with empirical application on Asian stock markets. Design/methodology/approach – It is based on a VAR-structural-GARCH model. Findings – The results clearly show that the main driver of fluctuations in Asian financial markets is the USA, with China having little connection with other markets. Further, evidence of financial contagion is found during both the 1997 Asian financial crisis and the 2008 global financial crisis. Originality/value – The method has two advantages: it is both uniquely determined and dynamic.

Unveiling investor-induced channels of financial contagion in the 2008 financial crisis using copulas

Understanding how financial crises spread is important for policy-makers and regulators in order to take adequate measures to prevent or contain the spread of these crises. This paper will test whether there was contagion of the subprime financial crisis to the European stock markets of the NYSE Euronext group (Belgium, France, the Netherlands and Portugal) and, if evidence of contagion is found, it will determine the investor-induced channels through which the crisis propagated. We will use copula models for this purpose. After assessing whether there is evidence of financial contagion in the stock markets, we will examine whether the ‘wealth constraints’ transmission mechanism prevails over the ‘portfolio rebalancing’ channel. An additional test looks at the interaction between stock and bond markets during the crisis and allows us to determine if the transmission occurred due to the ‘cross market rebalancing’ channel or the ‘flying to quality’ phenomenon. The tests suggest that (i) financial contagion is present in all analyzed stock markets, (ii) a ‘portfolio rebalancing’ channel is the most important crisis transmission mechanism, (iii) and the ‘flight-to-quality’ phenomenon is also present in all analyzed stock markets.

Sovereign Contagion in Europe: Evidence from the CDS Market

This paper addresses the following questions. Is there evidence of financial contagion in the Eurozone? To what extent a country's vulnerability to contagion depends on as opposed the government's credibility? We look at the empirical evidence on European sovereigns CDS spreads and estimate an econometric model where a crucial role is played by time varying parameters. We model CDS spread changes at country level as reflecting three different factors: a Global sovereign risk factor, a European sovereign risk factor and a Financial intermediaries risk factor. Our main findings are as follows. First, Unlike the US subprime crisis which affected all European sovereign risks, the Greek crisis is largely a matter concerning the Euro Zone. Second, differences in vulnerability to contagion within the Eurozone are even more remarkable: the core Eurozone members become less vulnerable to EUZ contagion, possibly due to a safe-heaven effect, while peripheric countries become more vulnerable. Finally, market fundamentals go a long way in explaining these differences: they jointly explain between 54 and 80% of the cross-country variation in idiosyncratic risks and in the vulnerability to contagion, largely supporting the wake-up call hypothesis according to which market participants become more wary of market fundamentals during financial crises.

Financial Contagion through Attention Reallocation: An Empirical Analysis

This paper provides suggestive evidence of financial contagion between regions by fluctuations in international investors' attention allocation. Using Financial Times news stories about Thailand as a proxy for attention allocated to Southeast Asia, we find that the increase in uncertainty about Southeast Asian stock markets between January of 1997 and July of 1998 was associated with a higher attention allocated to this region. We also find that one more news story about Thailand in the Financial Times was statistically associated with a 6% (5%) increase in the stock market volatility of Brazil (Chile). This finding is consistent with financial contagion through attention reallocation of international investors.

Hedge Fund Crisis and Financial Contagion

This article examines the spillover effects of the collapse and bailout of Long-Term Capital Management (LTCM) on the stocks of a large sample of exposed and unexposed banks and brokerage houses to search for evidence of financial contagion. The basic finding is that the LTCM crisis led to widespread losses for financial institutions, including even regional and local banks and those with no known exposure to hedge funds. However, after controlling for characteristics that influence firms9 vulnerability to an exogenous economic shock, the authors find that the unexposed banks and brokerage houses remain virtually unscathed by the crisis. Hence, the results suggest that the market response to the financial turmoil at LTCM was rational, and the crisis only affected firms with exposure to hedge fund activities.