Pure Contagion Research Articles

Pure contagion vs. financial interconnection in the subprime crisis context: Short- and long-term dynamics

This paper examines the difference between pure contagion and financial interconnection by studying the U.S. and some American and Asian markets in the subprime crisis context. These markets are affected by the mortgage crisis, with data available from January 1, 2003 to December 30, 2011. The paper first identifies the turmoil period via the wavelet technique and adopts cointegration and Granger causality approaches by estimating vector autoregressive (VAR) and vector error correction models (VECM) models. Based on daily returns from stock market indices in five American countries (Mexico, Brazil, Canada, Argentina, and the U.S.) and eight Asian ones (Hong Kong, Japan, India, Indonesia, Malaysia, Singapore, Korea, and China), the results show eight cases of pure contagion and 10 cases of financial interconnection. In addition, there were high co-movements in the short term and low co-movements in the long term for financial interconnection cases. These findings have several implications for investors looking to diversify their portfolios internationally and for portfolio managers to expect and limit market risk. The results provide additional guidance to regulators and policymakers.

Describing financial crisis propagation through epidemic modelling on multiplex networks

This paper proposes a novel framework for modelling the spread of financial crises in complex networks, combining financial data, Extreme Value Theory and an epidemiological transmission model. We accommodate two key aspects of contagion modelling: fundamentals-based contagion, where the transmission is due to direct financial linkages, and pure contagion, where a crisis might trigger additional crises due to global effects. We use stock price, geographical location and economic sector data for a set of 398 companies to construct multiplex networks of four layers, on which a susceptible-infected-recovered transmission model is defined, in order to model the spread of financial shocks between companies by accounting for their interconnected nature. By utilizing stock price data for the 2008 and 2020 financial crises, we investigate and assess the effectiveness of our model in forecasting the propagation of financial shocks through the network, where a shock is detected by measuring stock price volatility. The results suggest that the proposed framework is effective in predicting the spread of financial crises. Our findings demonstrate the significance of each layer of the multiplex network structure, which differentiates between various transmission pathways, for predicting the number of affected companies, as well as for company-, sector- or location-specific predictions.

Jump Risk Contagion and Determinants Driven by COVID-19 in Sino-US Stock Market: An Empirical Analysis from a Dependence Perspective

This paper examines the jump risk contagion between the US and China during the financial crisis driven by COVID-19, and the impact of a series of determinants to detect the transmission mechanisms. Specifically, we employ the ARJI–GARCH model to capture jump behavior and apply the Clayton Copula to construct lower tail jump contagion. Furthermore, we conduct regression analysis on variables related to economic fundamentals and investor behavior to explore the fundamental or pure contagion hypotheses. Our results suggest an increased jump dependence during major catastrophic crises such as COVID-19, but it is closer to a memory-less process. Besides, bilateral trade, similarity in fundamentals and investor behavior are all important determinants, and pure contagion hypothesis exists between the Chinese and US stock markets during the pandemic.

Quantile coherency of futures prices in palm and soybean oil markets

The objective of the present work is to investigate the contemporaneous price co-movement in the futures markets of soybean and palm oil. This is pursued using quantile coherency (a statistical tool that allows for both frequency- and quantile-dependent linkages between stochastic processes) and daily futures prices from 2015 to 2023. The empirical findings suggest: (a) The co-movement between palm and soybean oil prices is not very high and, at the same time, it is asymmetric; prices in the two markets are more likely to crash than to boom together. (b) The intensity of co-movement tends to increase monotonically with the time-scale considered. However, the bulk of the adjustments to shocks tend to be completed within 1 month; the differences between coherency estimates in the medium- and in the long-run are rather small. (c) Price co-movement appears to be driven by both pure (short-run) contagion as well as by fundamental-based (long-run) contagion.

Contagion in the Euro area sovereign CDS market: a spatial approach

PurposeThis paper explores whether the Euro-area sovereign credit default swap market is prone to contagion effects. It investigates whether the sharp increase in sovereign CDS spread of a given country is due to a deterioration of the macroeconomic variables or some form of contagion.Design/methodology/approachFor this purpose, the authors use an innovative approach, i.e. spatial econometrics. Although modeling spatial dependence is an attractive challenge, its application in the field of finance remains limited.FindingsThe empirical findings show strong evidence of spatial dependence highlighting the presence of pure contagion. Furthermore, evidence of wake-up call contagion-increased sensitivity of investors to fundamentals of neighboring countries and shift contagion-increased sensitivity to common factors are well recorded.Originality/valueThis study aims to study a crucial financial issue that gained increased research interest, i.e. financial contagion. A methodological contribution is made by extending the standard spatial Durbin model (SDM) to analyze and differentiate between several forms of contagion. The results can be used to understand how shocks are spreading through countries.

Analysis of Dynamic Connectedness among Sovereign CDS Premia

This paper studies the dynamics of spillovers between sovereign Credit Default Swap (CDS) premia of nine countries, including Turkey, Russia, Brazil, South Africa, China, Germany, France, Italy and Spain. Weekly CDS data spans from July 2012 through June 2022. Adopting the methodology developed by Diebold & Yılmaz (2014), several connectedness measures are computed based on generalized forecast error variance decompositions generated through a time-varying parameter vector autoregressive model (TVP-VAR). The results show that the network’s connectedness level increased significantly during the COVID-19 outbreak and the Ukrainian war. Higher connectedness levels among European markets and developing countries are observed. Especially the connectedness levels between South Africa and other developing countries are remarkably high. The results reveal both fundamental-based and pure contagion channels and provide insight into the dynamic network of risk spillovers. A thorough understanding of international risk transmission channels is crucial for policy-makers and global investors regarding risk mitigation.

Analyzing pure contagion between crude oil and agricultural futures markets

Crude oil and agricultural product prices are important factors affecting a country's economic and social stability. The pure contagion between these two markets may lead to excessive price linkage, increasing the fragility of the financial system. This paper uses the CEEMDAN method, fine-to-coarse reconstruction method, and TVP-VAR model to study the pure contagion between crude oil and agricultural futures markets. The empirical results show that there always is significant pure contagion between agricultural futures markets. However, pure contagion between crude oil and agricultural futures markets only exists in some specific periods. The crude oil futures market has obvious pure contagion to the agricultural futures markets in most periods. Only a few periods the agricultural futures have pure contagion to the crude oil futures. It is worth noting that the COVID-19 epidemic aggravates the pure contagion between crude oil and the agricultural futures markets. Based on the research conclusions, this paper puts forward corresponding policy recommendations, hoping to provide a reference and theoretical basis for the government to formulate corresponding policies.

Frequency spillovers and portfolio risk implications between Sukuk, Islamic stock and emerging stock markets

This study examines the multiscale spillovers between five important emerging stock markets namely, Brazil, Russia, India, China, and South Africa (BRICS) and both Dow Jones Islamic stock market index (DJIM) and Dow Jones Sukuk index (DJ Sukuk) using bivariate and multivariate wavelet approaches. The results show evidence of strong time-scale co-movements between conventional and Islamic stock markets at different frequencies. Moreover, the pure contagion is evident at the short-term whereas fundamental contagion appears in the long run. Sukuk show relatively less integration with the conventional stock markets of BRICS at high and medium frequencies. DJIM and DJ Sukuk provide risk diversification opportunities for BRICS stock market volatility. The diversification benefits in terms of lower portfolio VaR is available in the high frequency scale or at the short-term. In long-run, the Islamic equity market become fundamentally integrated with the BRICS stock markets, thus, reduces hedging gains.

Time‐varying pure contagion effect between energy and nonenergy commodity markets

AbstractThis paper combines the Kalman filtering technique and the time‐varying parameter vector autoregression model with stochastic volatility model to explore pure contagion effects between energy and nonenergy (i.e., industrial metals, precious metals, and agricultural) commodity markets. Empirical results show the significant pure contagion effects between energy and industrial metals markets in most periods, while pure contagion effects between energy and precious metals and agricultural markets occur only in a few specific periods. Comparing the level of pure contagion effects between different commodity markets, energy is still the main price transmitter. In addition, with the acceleration of the global commodity market financialization process, the frequency and harm of pure contagion effects are gradually increasing. Notably, the COVID‐19 pandemic is emerging as another major crisis after the global financial crisis, exacerbating the pure contagion effects between energy and precious metals and agricultural markets.

Contagion effects in ASEAN-5 exchange rates during the Covid-19 pandemic

The aim of this study is to examine the pure and fundamentals-based contagion effects in ASEAN-5 exchange rates during Covid-19 period using daily exchange rates from June 2019 to December 2020. We adopt VECM within the structural VAR framework and higher time–frequency wavelet analysis. The VECM findings show that ASEAN-5 exchange rates are cointegrated during this pandemic and should there be any disequilibrium, daily rate of adjustments in the Indonesian rupiah, Malaysian ringgit and Singapore dollar are 6.58%, 1.47% and 2.45% respectively. The wavelet power spectrum implies that Indonesia, Malaysia and Singapore experience prolonged high degree of exchange rates volatility, Thailand experiences mild volatility in the short run and high volatility in the long run and only Philippines experiences mild volatility in the short run and no heightened long run volatility. The wavelet coherence shows Indonesian rupiah reacts first to the Covid-19 shock leading to fundamentals- based contagion to Malaysia and Thailand, and temporary pure contagion based on sentimental to Philippines and Singapore. Only the Philippine peso that insulates itself from the long run shocks. These findings are important as it gives insights into the nature of contagion among ASEAN-5 exchange rates due to global shock of Covid-19 and the need for timely intervention to prevent the short run contagion turning into the long run.

Comovement across BRICS and the US Stock Markets: A Multitime Scale Wavelet Analysis

During the past two decades, financial markets across the globe have experienced sporadic waves of crashes. Such waves raise concerns about the vulnerability of global financial markets and the transmission mechanisms of shocks beyond borders. The current study examines the co-movement of stock markets in BRICS (Brazil, Russia, India, China and South Africa) countries and the United States of America (US). It unfolds their exposure to contagion effects during the major financial crises, which have flared up since 2000. Daily close price indices of selected stock markets were used in this endeavour. These data spanned from 5 January 2000 to 10 March 2021. A wavelet decomposition on stock return series was performed on these data to determine the multihorizon nature of comovement (pure contagion or interdependence) and the dynamics of market integration. It emerges that before the 2006-US-housing-bubble and after the 2011/13-EU-sovereign-debt crises, some shocks caused pure contagion. Such transmission generated short-term shocks. Most of the earlier shocks, particularly the US subprime and the EU Sovereign Debt crises, were spread via interdependence. Trade linkages and economic integration improvements enhanced such interdependence. In addition, when analysing the episodes of market integration, it arises that, in general, the short- and long-term integration strengthened and deepened comovement among equity markets. From the portfolio diversification and risk management perspectives, these results indicate that the market in China provided lucrative grounds for short-run investors from the other countries covered in the current study. These results can be helpful for investors interested in portfolio diversification in the BRICS region. They might also help policymakers in the region mitigate the exposure to external shocks of markets.

What influences stock market co-movements between China and its Asia-Pacific trading partners after the Global Financial Crisis?

This paper investigates the stock market co-movements between China and its 12 trading partners in the Asia-Pacific region after the Global Financial Crisis. The Dynamic Conditional Correlation (DCC) - Mixed Data Sampling (MIDAS) model is adopted to extract short and long-run correlations. The author utilizes the weekly conditional correlations to detect contagion and explores transmission mechanisms by regressing the monthly economic and financial variables on the monthly conditional correlations. The empirical results show that recent events (specifically, the Shanghai stock market crash, the US-China tariff war, and the COVID-19 pandemic) have increased the contagion incidences across the stock markets in China and its trading partners. Moreover, bilateral trade and market similarities are major drivers of stock market co-movements between China and developed partners as well as between China and emerging partners. Apart from country-pair-specific factors, common factors (such as the Chinese illiquidity pressure) also affect the co-movements between Chinese and its partners' stock markets during the whole and turmoil periods. Besides, the regression results for contagion episodes are mixed. On the one hand, stock market co-movements are irrelevant to most economic fundamentals, indicating pure contagion. On the other hand, differences in industrial production growth and market size affect stock market co-movements between China and its emerging partners.

Spatial contagion between financial markets: new evidence of asymmetric measures.

The objective of this paper is to identify the presence, direction and time at which the pure contagion effect occurred between financial markets. In so doing, the aim is to prove the existence of both spatial and temporal asymmetries of pure contagion effects. Firstly, a new empirical framework is proposed in order to define a spatial contagion index using the conditional cumulative distribution function as a parameter to estimate a conditional copula. This methodology enables us to estimate a dynamic conditional copula, providing information about how the market sent pure contagion effects and when. Secondly, in addition to detecting the direction of contagion, the real-time contagion effect is determined, enabling us to calculate the delay of contagion effects (spillover) between financial markets. The present empirical results show the existence of both spatial and temporal asymmetry for bilateral contagion effects for 16 mature and emerging stock markets during the 2001–2018 period. This proves the importance of taking temporal asymmetry into account when we want to detect the contagion effect of every crisis and to estimate the period of pure contagion relating to investors’ behaviors. Finally, these findings highlight the fact that contagion effects were more intensive during the subprime crisis than they were during the European debt crisis.

Contagion Effect in ASEAN-5 Currency Markets During COVID-19

The aim of this study is to examine an existence of contagion in ASEAN-5 currency markets during COVID-19 period, the type of contagion whether it is pure contagion that happens in the short run only or fundamentals-based contagion in the long run and the country source of this contagion effect. The study starts by imposing structure to the regional exchange rates guided by variable lag Granger causality and variable lag Transfer Entropy, followed by co-integration and Error Correction Model (VECM) within the Structural VAR framework to capture the short run, long run and error correction term (ect) in currency market of ASEAN-5. The next empirical framework used is wavelet analysis specifically wavelet power spectrum and wavelet coherency to capture the multi scale time and frequency domain of currency market volatility and covariance respectively. The VECM findings show there exists long run cointegration in the ASEAN-5 currency markets during COVID-19 and any disequilibrium will be adjusted by Indonesian Rupiah, Malaysia Ringgit and Singapore Dollar at daily rate of adjustments of 6.58%, 1.47% and 2.45% respectively. The wavelet power spectrum provides evidence of short run and long run contagion effect in Indonesia, Malaysia and Singapore currency market, while Philippines and Thailand experience minimal contagion effect in the short run and heightened volatility in the long run for Thailand. No long run contagion effect for Philippines. The wavelet coherency shows contagion effect emanating from Indonesia Rupiah to its neighboring countries in the short and only to Thailand and Malaysia in the long run.

Evidence of Stock Market Contagion during the COVID-19 Pandemic: A Wavelet-Copula-GARCH Approach

In this study, we propose a wavelet-copula-GARCH procedure to investigate the occurrence of cross-market linkages during the COVID-19 pandemic. To explore cross-market linkages, we distinguish between regular interdependence and pure contagion, and associate changes in the correlation between stock market returns at higher frequencies with contagion, whereas changes at lower frequencies are associated with interdependence that relates to spillovers of shocks resulting from the normal interdependence between markets. An empirical analysis undertaken on six major stock markets reveals evidence of long-run interdependence between the markets under consideration before the start of the COVID-19 pandemic in December 2019. However, after the health crisis began, strong evidence of pure contagion among stock markets was detected.

What drives European Union stock market co-movements?

This paper analyses the co-movements and contagion between 24 European Union stock markets. We apply a Dynamic Conditional Correlation - Mixed Data Sampling model to extract short and long-run correlations. We use short-term correlations to detect contagion. Finally, we employ a gravity-type regression to investigate the determinants of long-term correlations. First, we find significant differences between the stock market co-movements, which seem to depend on economic development and market deepening. Moreover, the time varying correlations emphasize different phases of development, i.e. integration, contagion, and divergence. Second, the contagion estimates reveal that, during some crisis episodes, the contagion is temporary, while for other periods the contagion becomes more persistent, indicating a herding behavior. Third, the co-movements determinants show that global factors and economic similarities are important in explaining correlations. Finally, our findings on long-term correlations drivers in contagion times are mixed, revealing, on the one hand, a pure contagion that is not explained by fundamentals, and, on the other hand, a wake-up call in terms of cross-border bank flows.

Contagion Risks in Emerging Stock Markets: New Evidence from Asia and Latin America

The purpose of this study is to investigate whether contagion actually occurred during three well-known financial crises in 1990s and 2000s: Mexican “Tequila” crisis in 1994, Asian “flu” crisis in 1997 and US subprime crisis in 2007. We apply dynamic conditional correlation models (DCC-GARCH(1,1)) to daily stock-index returns of eight Asian stock markets, six Latin American stock markets and US stock market. Defining contagion as a significant increase of dynamic conditional correlations, we test for contagion by using a difference test for DCC means. The results obtained shows that there is a pure contagion from crisis-originating markets to other emerging stock markets during these three crisis. However, the contagion effects are different from one crisis to the other. Firstly, during the Mexican crisis, contagion is detected in only the Latin American region. Secondly, during the Asian crisis, we find evidence of contagion in some markets in both the Asian and Latin American regions. Finally, contagion is proved to be present in all stock markets with the only exception for Brazil during US subprime crisis.

The contagion effect between the oil market, and the Islamic and conventional stock markets of the GCC country

PurposeThis study aims to investigate the transmission of shock between the oil market and the Islamic and conventional stock markets of the Gulf Cooperation Council (GCC) countries during the oil shocks of 2008 and 2014.Design/methodology/approachThis study uses two models. First, the dynamic conditional correlation–generalized autoregressive conditionally heteroskedastic model has been used to capture the fundamental contagion effects between the oil market and the Islamic and conventional stock markets during the tranquil and turmoil-crisis periods of 2008-2014. Second, the filter of Kalman has been used to capture the effects of pure contagion between the oil market and the GCC Islamic and conventional stock markets. The authors analyze the dynamic correlation between forecasting errors of oil returns and stock returns of GCC Islamic and GCC conventional indices.FindingsThe main findings of this investigation are: first, the estimation of the dynamic conditional correlation– generalized autoregressive conditionally heteroskedastic model for oil market and the Islamic and conventional stock markets proves that the Islamic and conventional stock markets and oil market displayed a significant increase in the dynamic correlation during the turmoil period, from mid-2008 and mid-2014. This proves the existence of contagion between the markets studied. Second, the authors analyze the dynamic correlation between forecasting errors of oil returns and stock returns of GCC Islamic and GCC conventional indices. They show a strong increase in the correlation coefficients between the oil market and the conventional GCC stock markets, and between the conventional and Islamic GCC stock markets during the oil crisis of 2014. However, there is no change in regime in the figure of the correlation coefficient between the oil market and the GCC Islamic stock markets during the 2008 financial crisis. This pure contagion is mainly attributed to the herding bias in 2014 oil crisis.Originality/valueThis study contributes to identifying the contribution of herding bias on the volatility transmission between the oil markets, and the GCC Islamic and conventional stock market, especially during two controversial shocks: the 2008 oil-price increase and the 2014 oil drop.

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.

Regional spillovers across transitioning emerging and frontier equity markets: A multi-time scale wavelet analysis

The episodic wave of crises experienced across the global financial markets over the past two decades has raised questions surrounding the vulnerability of transitioning emerging and frontier equity markets to exogenous shocks. These markets, by design, have lacked the institutional or financial architecture supporting their capital base compared to more established markets. We make the initial attempt to examine four such stock markets (Saudi Arabia, UAE, South Africa and Israel). We perform multi-timescale analysis using wavelet-based time and frequency decompositions in order to investigate (i) whether the shocks transmitted were pure contagion or fundamental-based and (ii) also whether the dynamic evolution of stock market integration was mainly short-term or long-term. We find that prior to the 2008/09 US subprime crisis, the shocks generated pure contagion in contrast to the subprime crisis that reveals evidence supportive of fundamental-based contagion. Further, when exploring the dynamics of market integration, we find that integration strengthens over time as opposed to any immediate short-term outcome. This supports policies engendered to promote stock market resiliency and stability.