Financial Crisis Contagion Research Articles

From 'Looking East' to the 1997 Asian Financial Crisis: How Mahathir Mohamad Steers Malaysia's Economic Development from the 1980s to 2000s

The last two decades of 20th century signifies a time of burgeoning economic growth but also a time of financial turmoil and vulnerability for Southeast and East Asian Countries. Extensive studies have focused on the newly industrialized countries such as Japan and Singapore. The examination and critique on how the emerging new economies like Indonesia and Malaysia adapt to and resist the wave of globalization to achieve its political and economic autonomy remain a compelling topic of discussion, which can be further scrutinized through the lens of leadership roles and impacts. This paper will focus on the time of first tenure of Malaysia’s Prime Minister Mahathir Mohamod. Specifically, the paper will answer the question that how the national leadership and its political stance and economic policies play a role in realizing the rapid growth and modernization while revitalizing the economy amidst the contagion of financial crisis. By conducting a chronological analysis on legal documentations on policies implemented through end of 1970s to 2000s and probing onto the official statistics reflective of Malaysia’s economy’s performance, the paper concludes that an effective national leadership and its affiliated political and socio-economic policies play instrumental roles in helping Malaysia achieve a rapid economic growth and modernization since 1980s, while sustaining the economy’s vitality through the 1997 Asian Financial Crisis.

Transmission Machine of International Financial Crisis Based on VAR Model

The financial crisis has always been accompanied by human economic activities, and its outbreak has a serious impact on people's normal life, and it has no warning, which is a problem of great concern to all countries in the current economic development. Based on the monthly data of long-term bond yields of eight countries (six European countries, the United States and Japan) from December 2009 to February 2012, through correlation test and Granger causality analysis, the results show that there is no Granger causality between the bond yields of various countries and the bond yields of Greece before the European debt crisis, but Granger causality exists between the bond yields of Germany, France and Italy and Greece after the crisis. Finally, it puts forward the process of China's complete opening of capital account and the problems that should be paid attention to after that. The latest development direction of vector autoregressive model is the identification of exogenous policy shocks and the estimation of panel vector autoregressive model. This paper studies and analyzes the transmission mechanism of international financial crisis. Vector autoregressive model is used to describe the transmission mechanism of international financial crisis. The enhancement of the ability to resist the contagion of financial crisis is an important factor to promote the sound development of China's economy. Starting with the related concepts of the transmission mechanism of international financial crisis, this paper probes into the specific transmission modes of international financial crisis and the suppression measures of the transmission mechanism of international financial crisis.

Foreign exchange market asymmetries in Pacific small island developing states: Evidence from Fiji

AbstractAfter abandoning Bretton Wood, the foreign exchange market has been dominated by three types of economies: export‐oriented economies (China and other Asian countries), commodity economies (Australia, New Zealand, Canada, and oil exporting nations) and reserve‐currency economies (US, EU, UK, and Swiss). As a result, the asymmetric development of the foreign exchange market has reduced the monetary and fiscal space for PSIDS, which face structural challenges such as a low population base, import dependence, aid dependency, climate risk, and political uncertainty. The ‘Exchange Market Pressure Index’ (EMPI) for Fiji is developed in this article to quantify the pressure on the exchange rate and monetary authorities' responses to micromanaging balance sheet impacts. The calculated EMPI accurately reflects four instances of financial distress in Fiji, including significant exchange market pressure in response to growing trade deficits and external debt, the global financial crisis's contagion effect, and political uncertainty. Our EMP Index's robustness is attributed in part to the employment of a dynamic time series estimate method, a time‐varying weighing scheme, and a high‐frequency monthly dataset.

Contagion of Financial Crisis: Evidence of ARDL Model

Contagion of Financial Crisis: Evidence of ARDL Model

Identifying path of Global Financial Crisis Contagion Direction on Industries of Iran Stock Market

Simultaneous understanding of volatilities and changes in financial markets is very important to optimize the portfolio and risk management methods. The 2008 financial crisis led into devaluation of most assets, increased volatilities and endangered several institutional investors' survival. When the stock market' correlation is highly enhanced, risk and return management with the classic portfolio theory becomes severely challenging. In this study, to manage systematic and non-systematic risks by investors and policymakers in case of similar financial crises, the Effect of global financial crisis contagion is examined through the path of S&P500 global index, and DFM regional index of different industries of Iran Stock Market is examined using DFGM contagion test and stochastic Ornstein Uhlenbech process. The results show that Dubai Stock Market has an important role in crisis expansion into different sectors of Iran Stock Markets so that the fundamental contagion effects are channelled via this direction. Also, according to the results, the starting point of the global financial crisis contagion was the basic metals industry, and the contagin happened in metal ores and petroleum products sectors with different rates. Finally, the global financial crisis is spread into different industries of Iran Stock Market via financial links and not trough commercial ones. Identifying the direction of contagion of financial crisis provides an opportunity for investors to apply hedging and asset allocation strategies optimally.

Contagion of the shareholder market: cases of Colombia, México, Perú, Chile and Argentina

This document study the existence of financial crisis contagion, it defined like the transmission of the shocks between countries, which translates in increasing in the correlation anything beyond or fundamental link, taking as a source of contagion by EEUU, Brasil, and analyzing Mexico, Colombia, Peru, Chile and Argentina like “Infected” countries, for the period covered between July 3 of 2001, date of unification of the Colombia Stock Market, to July 3 of 2010. To identify crisis period, and to evoid volatility overestimation, it used the algorithm iterative cumulative sum of squares ICCS, developed by Inclan y Tiao (1994), additionally calculated the dynamic conditional correlation (DCC) Engle Model (2002). The document includes a review of several studies, concepts, and transmission (Contagion) methodologies, and it constitutes one of the few studies that includes Colombia like analysis source. So this study verifies the existence of contagion in the countries studies, except Argentina, but warns that the measure of impact that a crisis in a given country has over other countries is highly sensitive to the way we choose the time window before and after the crisis.

International Financial Integration and Crisis Contagion

AbstractInternational financial integration helps to diversify risk but also may spread crises across countries. We provide a quantitative analysis of this trade-off in a two-country general equilibrium model with collateral-constrained borrowing using a global solution method. Borrowing constraints bind occasionally, depending upon the state of the economy and levels of inherited debt. We examine different degrees of international financial integration, moving from financial autarky, to bond and equity market integration. Financial integration leads to a significant increase in global leverage, substantially escalates the probability of crises for any one country, and dramatically increases the degree of “contagion” across countries. Outside of crises, the impact of financial integration on macroeconomic aggregates is relatively small. But the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky. Thus, a trade-off emerges between the probability of crises and the severity of crises. Using a large cross-country database of financial crises in developing and developed economies over a forty-year period, we find evidence in support of the model.

Contagion of the Subprime Financial Crisis on Frontier Stock Markets: A Copula Analysis

This study assesses contagion from the USA subprime financial crisis on a large set of frontier stock markets. Copula models were used to investigate the structure of dependence between frontier markets and the USA, before and after the occurrence of the crisis. Statistically significant evidence of contagion could only be found in the European region, with the markets of Croatia and Romania being affected. The remaining European markets in our sample and the others, located in America, Middle East, Africa, and Asia, appear to have been isolated from the subprime crisis impact. These results are useful for international investors interested in enlarging the geographical diversification of their portfolios, but also for the considered countries’ policymakers who should attempt to improve the attractiveness of stock markets for domestic and foreign investors while simultaneously attempting to maintain their relative level of insulation against future foreign crises.

RETRACTED: IoT study on the total risk management and cluster-coordinated development based on synergy theory

Abstract Based on the new perspective of the financial crisis contagion channel of the international listed companies, this Paper aims to a real-time, targeted and international financial risk warning index system of listed companies and synthesize the financial stress index of listed company that adapt to China’s situations from such three dimensions as foreign exchange market, banking industry and stock market. The empirical study of financial risk early warning in Chinese listed companies based on the Markov regime-switching model has shown that the M2/GDP growth rate, the volatility of stock market and the foreign trade dependence have a positive relationship with the current financial risk of the listed companies in China; stock market returns and foreign exchange reserves/GDP have inverse relationship with the financial risks of listed companies; the financial risks of listed companies in China mainly come from the excessively loose monetary policy during the crisis and the imperfection of the stock market and its regulatory system. The forecast shows that China will be in the state of low financial risk in listed companies from 2014 to 2015.

Research on the Mechanism of the Spatial Contagion of Global Financial Crises: From the Perspective of Pure Contagion

In the post financial crisis era, the contagion of a financial crisis remains an important issue. Drawing upon the idea of absolute physical space in classical cartography, this paper attempts to construct the space of political and economic systems for the contagion of financial crisis through a decomposition and re-synthesis of Index of Economic Freedom. It then utilizes the Spatial Autocorrelation Model to analyze the characteristics of the spatial distribution, structure, and interactions of the contagion. The empirical findings show that the contagion of international financial crisis has dependence on both geographical space and space of economic systems, and the spatial dependence on the latter is more significant and intense than that on the former. These findings verify the pure contagion of a financial crisis, that is, similar political and economic systems rather than geographical proximity among countries are more likely to lead to the contagion of a financial crisis.

Financial contagion of the global financial crisis from the US to other developed countries

With the global integration of financial markets, the international capital flows have become one of the main factors playing a significant role indetermining adjustments of domestic financial markets. This study examines the co-movement of exchange rates and stock market indexes among those of the US, Canada, UK, Germany, Italy, France and Spain. Specifically the correlation and Vector Auto-regression (VAR) are applied to investigate the relationship. The correlation analysis shows that there exist the statistically significant co-movements only during the period of Global Financial Crisis. Also the result obtained from VAR indicates that the US has been the origin of causality influencing the directions of variations of exchange rates and stock market indexes of other countries, except the case of UK. These findings identify the dominance of the US on adjustments of financial markets in other developed countries, especially during the Global Financial Crisis, and also suggest the necessity for all countries on formulating appropriate policies to mitigate impacts on the local economy.

Financial contagion of the global financial crisis from the US to other developed countries

Financial contagion of the global financial crisis from the US to other developed countries

Markov regime-switching quantile regression models and financial contagion detection

In this paper, we propose a Markov regime-switching quantile regression model, which considers the case where there may exist equilibria jumps in quantile regression. The parameters are estimated by the maximum likelihood estimation (MLE) method. A simulation study of this new model is conducted covering many scenarios. The simulation results show that the MLE method is efficient in estimating the model parameters. An empirical analysis is also provided, which focuses on the detection of financial crisis contagion between United States and some European Union countries during the period of sub-prime crisis from the angle of financial risk. The degree of financial contagion between markets is subsequently measured by utilizing the quantile regression coefficients. The empirical results show that in a crisis situation, the interdependence between United States and European Union countries dramatically increases.

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.

Indonesian Economy: Contagion of World Financial Crisis and Policy Response

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Financial market contagion during the global financial crisis: evidence from the Moroccan stock market

In this paper, we aim at the study of the contagion of the global financial crisis (2007–2009) on Moroccan stock market. Our study focuses to examine whether contagion effects exist on Moroccan stock market, during the current financial crisis. Following Forbes and Rigobon (2002), we define contagion as a positive shift in the degree of comovement between asset returns. We use stock returns in MASI, CAC, DAX, FTSE and NASDAQ as representatives of Moroccan, French, German, British and US markets, respectively. To measure the degree of volatility comovement, time–varying correlation coefficients are estimated by flexible dynamic conditional correlation (DCC) multivariate GARCH model. We investigate empirical studies using the DCC–GARCH framework to test the contagion hypothesis from US and European markets to the Moroccan one.

U.S. subprime financial crisis contagion on BRIC and European Union stock markets

Se utiliza la Teoria de Copulas para analizar el contagio entre los BRIC (Brasil, Rusia, India y China) y mercados de acciones de la Union Europea con el mercado estadounidense. Los indices de mercado utilizados para el periodo del 1 de enero de 2005 al 27 de febrero de 2010 fueron: MXBRIC (BRIC) MXEU (Union Europea) y MXUS (Estados Unidos). Se evalua en este trabajo la adecuacion de las principales copulas encontradas en la literatura financiera mediante el uso de los criterios estadisticos de log-verosimilitud, informacion de Akaike e informacion bayesiana. Se presenta un estudio innovador en el area de contagio, debido a la utilizacion de copulas condicionales, que permite calcular el aumento de correlacion entre los indices, en un enfoque no parametrico. La copula Joe-Clayton simetrizada presento la mejor adecuacion para los pares de retornos considerados. Los resultados indican que existe evidencia del efecto de contagio en los mercados de la Union Europea y de los BRIC, para un nivel de significacion del 5%. Ademas, hay evidencias de que el contagio de la crisis financiera de Estados Unidos fue mas pronunciado en la UE que en los mercados de los BRIC para un nivel de significacion del 5%. De esa manera, las carteras de acciones formadas por empresas de los paises BRIC pudieron ofrecer una mayor proteccion a los inversores durante la crisis financiera subprime. Este resultado esta en linea con otros estudios que muestran la creciente correlacion entre los mercados, especialmente en los momentos de caida.

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.

The dynamic contagion of the global financial crisis into Japanese markets

This paper investigates the risk contagion channel of the global financial crisis into Japan using daily data on bond risk premiums for the financial and manufacturing industries from July 18, 2006 to May 25, 2010. We employ a bivariate EGARCH model with the constant exogenous contagion impacts of foreign industries and the time-varying endogenous contagion impacts of domestic industries. We find evidence that: (i) a constant exogenous impact from foreign industries appears in the risk premium for 5-year bonds issued by manufacturing industry firms, and (ii) contagion only exists from the manufacturing industry to the financial industry, and that there is no evidence of any reverse causation, even during the Lehman Brothers shock on September 15, 2008. Thus, in Japan, risk transfers from foreign industries to the domestic manufacturing industry, and thence to the domestic financial industry.

International Financial Integration and Crisis Contagion

International financial integration helps to diversify risk but also may increase the transmission of crises across countries. We provide a quantitative analysis of this trade-off in a two-country general equilibrium model with endogenous portfolio choice and collateral constraints. Collateral constraints bind occasionally, depending upon the state of the economy and levels of inherited debt. The analysis allows for different degrees of financial integration, moving from financial autarky to bond market integration and equity market integration. Financial integration leads to a significant increase in global leverage, doubles the probability of balance sheet crises for any one country, and dramatically increases the degree of `contagion' across countries. Outside of crises, the impact of financial integration on macro aggregates is relatively small. But the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky. Thus, a trade-off emerges between the probability of crises and the severity of crises. Financial integration can raise or lower welfare, depending on the scale of macroeconomic risk. In particular, in a low risk environment, the increased leverage resulting from financial integration can reduce welfare of investors.