Real Linkages Research Articles

Financial contagion drivers during recent global crises

Whenever a crisis hits, it is likely to spread simultaneously among stock markets due to their interconnection. This phenomenon, known in the literature as financial contagion, may have a long-lasting effect and manifest itself in herd behavior. A sample of worldwide MSCI (Morgan Stanley Capital International) indices covering the subprime, European, and COVID-19 crises is used to study the presence of contagion, its transmission channels, and potential herd behavior. These channels—real linkages, financial mechanisms, or investor beliefs—are proxied by macrofinance factors. Their impact on stock correlations is tested using an extension of the dynamic conditional correlation model that includes external regressors. Results show evidence of contagion during the three crises, driven mainly by investor expectations and their effects on volatility. Moreover, during the COVID-19 crisis, the dissemination of information, as measured through text-based indices, played a significant role in market contagion and led to herd behavior. • Evidence is unveiled of financial contagion/herd behavior during the three crises. • Contagion transmission channels were studied with an extension of the DCC model. • In general, investor expectations/volatility (VIX) act as main contagion drivers. • Belief channels (text-based indices) explain contagion during the COVID-19 crisis. • Herd behavior (news-driven) is detected mainly after the COVID-19 outbreak.

Identifying Sovereign Risk Spillover Channels: A Spatial Econometric Approach

ABSTRACT We apply novel spatial econometric techniques to investigate spillovers in sovereign risk for 41 advanced and emerging economies during 2004–2019. We find that sovereign risk spillover channels that play major roles in various periods are different. Real linkages (trade, financial, and geography) and information channel both play major roles in spillover effects during the full sample period. During the financial crisis period, only business connections (trade and financial) have an effect, while only the geographical distance channel did not have an effect during the European debt crisis period. We also assess the relative importance of the direct and indirect effects of macroeconomic variables. We observe that the long-term effects are larger than the short-term effects. Ultimately, our analysis emphasizes the importance of considering multiple channels when analyzing sovereign risk spillovers.

A policymaker’s dilemma: real linkages or irrational behaviors?

PurposeThis paper aims to test whether the latest global financial crisis propagated contagiously from the USA to the rest of the world.Design/methodology/approachIf the reason of the propagation of a crisis is a normal time interdependence with the crisis origin country due to real linkages, the spread of crisis can be limited by implementing well-defined preventive policies. On the other hand, if a crisis propagates because of the speculative attacks or irrational behaviors, the “national policymakers will face difficulties in protecting their markets from such a crisis” (Kleimeier et al., 2003, p. 2). Therefore, separation of contagion and interdependence may provide crucial insights for policymakers to implement appropriate policies to prevent and/or stop the financial crisis. Hence, this paper compares the heteroscedasticity-corrected conditional correlations and dynamic conditional correlations in the tranquil and shock periods.FindingsThe findings were quite straightforward and consistent for both Forbes and Rigobon heteroscedasticity correction technique and dynamic conditional correlation (DCC) model. The Forbes and Rigobon technique failed to reject the null of no contagion for 25 countries in our data sample, while the DCC model failed to reject the null of no contagion for 21 countries. While heteroscedasticity-corrected correlation technique confirmed the presence of a contagion for six countries, the DCC technique confirmed the presence of a contagion for ten countries.Originality/valueThis study particularly investigates whether the subprime mortgage crisis spilled over contagiously to the rest of the world. To investigate whether there is a significant increase in the cross-market correlations between the crisis origin country, the USA and the rest of the world markets during the latest financial crisis, both heteroscedasticity-corrected correlation technique and DCC model are used.Therefore, this study possibly contributes well to the literature using a large country set and conducting the analysis from different angles for important properties.

Explaining Monetary Spillovers: The Matrix Reloaded

Using monetary policy shocks for seven advanced economy central banks, measured at high-frequency, we document the strength and characteristics of interest rate spillovers to 47 advanced and emerging market economies. Our main goal is to assess different channels through which spillovers occur and why some countries' interest rates respond more than others. We find that there is no evidence that spillovers relate to real linkages, such as trade flows. There is some indication that exchange rate regimes influence the extent of spillovers. By far the strongest determinant of interest rate spillovers is financial openness. Countries that have stronger bilateral (and aggregate) financial links with the US or euro area are susceptible to stronger interest rate spillovers. These effects are much more pronounced at the longer end of the yield curve, indicating that while countries retain policy rate independence, financial conditions are influenced by global yields.

Measuring sovereign risk spillovers and assessing the role of transmission channels: A spatial econometrics approach

We contribute to the literature on international risk spillovers by developing a unified framework based on spatial econometrics that enables us to address the following questions: (i) what are the effective transmission channels – real linkages and informational channels – of international risk spillovers across countries and/or regions, (ii) what are the most dominant ones, and (iii) which countries are most at risk for their environment and which are suffering the most from international exposure. Our analysis, based on 41 advanced and emerging economies from 2008Q1 to 2012Q4, shows that among the considered channels for explaining international spillovers of sovereign bond spreads, the informational channel is of utmost importance. Our results challenge previous findings from the literature in which the empirical strategy did not accommodate altogether important features of country spillovers, such as the co-existence of multiple transmission channels in the presence of contemporaneous and time-lagged interactions. Ultimately, our stress-testing analysis reveals important insights on countries prone either to international spillovers, international exposure or both at the regional and the worldwide level.

Economic and Financial Interconnections and Income Growth Convergence in Asia: A Real-Financial Nexus?

ABSTRACTThis article empirically examines economic and financial linkages for emerging Asian economies for the period 2000 to 2014. Taking a multivariate approach to measuring integration, we examine a number of measures of economic interconnections to investigate whether (and which) individual dimensions of these connections might drive economic integration. We also provide an empirical assessment of whether and how real and financial linkages drive income growth convergence. Our article finds two important results: First, interconnections between the ASEAN-5 countries are driven primarily by financial linkages while those for the larger countries in the region are driven by real linkages. Second, greater interconnections though prices tend to lead to greater income growth convergence.

Market Integration and Global Crashes

We develop an equilibrium model of real and financial market integration in which real firms and financial investors independently decide on their investment into different locations (countries). We show that, in the presence financial frictions, firms' real investment choices become strategic complements, leading to multiple, self-fulfilling equilibria. This fragility may lead to a global crash in which severe underinvestment into countries with under-developed financial markets spills over to countries connected to them by real investment linkages. We show that such global crashes are particularly severe when frictions are sufficiently symmetric across countries. By contrast, with enough asymmetry, the economy is likely to end up in a local crash equilibrium in which countries with low real investment barriers suffer the most.

Revisiting Bilateral Foreign Direct Investment Inflows into BRIC Economies

AbstractTracking the origins of bilateral foreign direct investment (FDI) flows is required to understand de facto real linkages between countries, which remains an important area of research and policy concern. However, existing bilateral FDI data may fail to correctly identify the original sources of FDI flows because they are based on flow of funds rather than ultimate ownership. As a consequence, several offshore financing centers (OFCs) and tax havens emerge as top sources of FDI flows which provide a misleading picture of bilateral real linkages between countries. In this context, this paper proposes an alternative framework to overcome this problem by examining data on mergers and acquisitions (M&As), which offers a far more informative geographical breakdown of sources of FDI inflows. The paper reconciles bilateral FDI inflows data with M&A data for the BRIC economies covering Brazil, Russia, India and China, for the period 2001–12. Further, in light of the increasing M&A flows to BRICs, of equal policy importance is the issue of what kind of FDI should the BRICs attract. In this regard, the paper also sheds some light on the macroeconomic policy implications of the different kinds of FDI flows to the BRIC economies.

Empirical Analysis of Linkages between Shanghai and Bombay Stock Markets

This paper explores the possible linkages between Shanghai and Bombay stock markets, accounting for complimentarity (through direct linkages) and substitutability (through indirect linkages) features between China and India to confirm real linkages in physical world. We employ a Dynamic OLS estimation proposed by Stock and Watson (1994) to estimate long run relationship between two variables. Considering the long memory feature of financial data, we apply the ARFIMA regression to our cointegrated residual derived from Dynamic OLS estimation. While differencing cointegrated residual with fractionally integrated order of d value, we estimate the long term and short dynamic relations of index returns in two stock markets, with the help of VECM equation. Furthermore, we apply a DCC-MGARCH model to analyze ARCH effect, GARCH effect, and volatility transmission between two stock markets. We use Quantile regression approach to study dependence structure and intensity at different quantiles between two markets. Dummy variables are taken to distinguish pre-crisis periods and in crisis, post-crisis periods.

Measuring Economic and Financial Interconnections for a Selection of Asia-Pacific Economies

This paper presents an examination of economic and financial linkages for a selection of economies in the Asia-Pacific region for the period 2001 to 2012. The countries examined are the ASEAN5 group of nations - Indonesia, Malaysia, the Philippines, Singapore and Thailand; the three large northeast Asian economies of China, Japan and South Korea; and Australia and New Zealand. Taking a multivariate approach to measuring integration, we examine 6 broad measures of economic interconnections for the following reasons: Firstly, to unlock as much information as possible about the nature of economic and financial integration between the countries examined. Secondly, to investigate whether (and which) individual dimensions of these connections might drive economic integration more generally, in the Asia Pacific region. We find that, regardless of the measure used, Australia and New Zealand are the most connected country pair. We also find that interconnections within and between the ASEAN5 countries are driven primarily by financial linkages, while those for the larger countries in the region are driven more by real linkages. Finally, we find that real links are positively related to financial links, that is, they exist as complements.

Comments by Shigeyuki Abe, on Shifting Drivers of Growth: Policy Implications for ASEAN-5

Shigeyuki Abe: This paper explores numerically the dependence of ASEAN-5 on their growth engines, i.e., the United States, EU, Japan, China, and India. A structural VAR model is used to find such dependence. The growth multiplier effects results show that the United States is still the largest growth engine, China has overtaken Japan, and India needs more time to be a significant engine. These results agree generally with common sense.The paper explains nicely the past and current patterns of trade of ASEAN-5 and concurrently remarks that complexity of trade structure in terms of intermediate and final products underestimates the importance of the United States and overestimates that of China at the outset.If the authors consider such over- and under-estimations are important, it is imperative to divide exports into intermediate products and final goods rather than treating exports as a total and applying the same method to empirically find the differences. One can refer to Ando and Kimura (2005), for instance, for the exact Harmonized System trade classifications of intermediate goods. The meaning of export share also needs to be discussed. It does not differentiate its components. The percentage in 1990 and that in 2010 should be interpreted differently because the compositions of exports should be different. More advanced products are traded in 2010 compared with those in 1990; 10 percent in 2010 quite likely means more than 10 percent in 1990.A structural VAR model is a smart model but cannot tell us much about the linkages of many important variables. In this model, GDP growth is explained by export shares only. This aspect of the model is the cause of results that go against common sense; the multiplier effects of the growth engines on the Philippines are the lowest, for example. The Philippines is a part of the production network in Asia and its importance as playing a part in supply chains cannot be underestimated. In addition, the Philippines is known as remittance and call-center country. Such activities cannot be captured by trade shares alone. The real linkages with the United States should be quite large if we add contributions of migrant workers and call-center business.The characteristics of East Asia's supply chain is, as illustrated by Figure 2, that China imports intermediate goods from ASEAN, Asian NIEs, and Japan and assembles parts and exports final goods to the United States, EU, and Japan. Here one should note the linkage of Japan and China. The authors conclude that Japan lost the largest ground over the past three decades as a growth engine for ASEAN-5. This needs to be closely checked again because Japan affects China from the start. Japan-China-ASEAN-5 linkages should be shown explicitly.The gap between the model and reality is huge. Thus, some policy suggestions drawn by the model experiments need to be duly evaluated. Three policy suggestions from the authors to note are: “New policy initiatives are needed to help ASEAN strategically balance the rising overdependence on China and to manage U.S. participation in the Asian regional economic grouping.”“ASEAN-5 should aim to increase trade and investment linkages with the most future potentials; i.e., India-Indonesia-Singapore, Australia-India, and Japan-Indonesia-Singapore.”“ASEAN-5 should aim to attract some of the Japanese, Korean, Taiwanese, and Hong Kong labor-intensive industries to relocate from China to ASEAN to produce for the United States, EU, Japan, India, and ASEAN markets.”The first suggestion is warranted because overdependence on China and strong U.S. dependence is the reality. But the second policy suggestion does require more reasoning. Australia is not included in the model and the potentials of others are not fully discussed either. The third is most controversial. All ASEAN-5 governments are eager to upgrade their industrial structure and they no longer enhance labor-intensive industries.Finally, we should be aware that most products traded are produced by multinational corporations (MNCs), where Japanese MNCs share a substantial percentage. This means that although Japan as an engine of growth is decreasing, its contribution is not.

Oil prices and effective dollar exchange rates

This study takes into account two previously neglected issues in its analysis of the relationship between oil prices and effective dollar exchange rates, namely, nonlinear adjustment dynamics and a distinction between nominal and real linkages. Beginning with a careful investigation of different subsets, and using a Markov-switching vector error correction model, we are able to discriminate long-run and time-varying short-run dynamics. Our findings show not only that the results depend on the choice of the exchange rate measure, but also that the time-varying causality patterns mainly runs from nominal exchange rates to nominal oil prices.

International Capital Mobility and Financial Fragility - Part 6 - Are All Forms of Financial Integration Equally Risky in Times of Financial Turmoil?

Using the 2008-09 global financial crisis, this paper examines the role of different forms of international financial integration for asset price contagion in crisis times. Defining contagion as the transmission of financial market movements beyond the co-movements that would occur in “tranquil” times, the paper looks into the presence of contagion in the period of turmoil prior to the fall of Lehman Brothers, in the main crisis period following the Lehman collapse, and in the ensuing late stages of the crisis. The analysis uses bilateral financial and trade linkages and daily data on equity and bond prices for a sample of 46 countries between 2002 and 2011. Bilateral debt integration and common bank lenders are found to have transmitted financial turmoil through equity and bond markets at the height of the crisis. During this period, real trade linkages also increased equity price co-movements. By contrast, no robust evidence is found that equity or FDI integration increased asset price co-movements during the crisis.

CROSS-COUNTRY CAUSES AND CONSEQUENCES OF THE 2008 CRISIS: INTERNATIONAL LINKAGES AND AMERICAN EXPOSURE

This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 85 countries; we focus on international linkages that may have allowed the crisis to spread across countries. Our model of the cross-country incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. The causes we consider are both national (such as equity market run-ups that preceded the crisis) and, critically, international financial and real linkages between countries and the epicenter of the crisis. We consider the United States to be the most natural origin of the 2008 crisis, though we also consider six alternative sources of the crisis. A country holding American securities that deteriorate in value is exposed to an American crisis through a financial channel. Similarly, a country which exports to the United States is exposed to an American downturn through a real channel. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to find strong evidence that international linkages can be clearly associated with the incidence of the crisis. In particular, countries heavily exposed to either American assets or trade seem to behave little differently than other countries; if anything, countries seem to have benefited slightly from American exposure.

Statement by the Managing Director to the International Monetary and Financial Committee on the Global Economy and Financial Markets

The recovery remains fragile and uneven. In many advanced economies, activity is still sluggish and unemployment high, while legacy problems in the financial system remain unresolved. Activity is more robust in many emerging and developing economies. However, their prospects also depend on a healthy, broad-based recovery among the advanced economies, owing to deep real and financial linkages. The key policy challenge is to effect a smooth transition from public- to private-sector-led growth in many advanced economies, and from external to domestically driven growth in key emerging economies. While short-term macroeconomic policies are broadly appropriate, completing the two rebalancing acts will require tackling the medium-term fiscal, financial, and structural challenges raised by the crisis. Without such reforms, growth could sputter, with grave economic and social consequences.

Investment Dynamics of Greater China Securitized Real Estate Markets and International Linkages

This paper focuses on evidence on securitized real estate markets as it investigates the volatility spillovers and correlation dynamics among the three real estate securities markets: China, Hong Kong and Taiwan in Greater China (GC) as well as their international linkages with the US securitized real estate markets over 1995-2009. Overall, results indicate the conditional volatility linkages and correlations among the GC securitized real estate markets have outweighed those relationships with the US, implying closer real estate market integration among the GC markets. Diversification potential across the markets is still good due to lower cross-market volatility interactions and correlation. Finally, there is also evidence supporting a higher level of conditional correlation and volatility spillover index in the post Asian aw well as the global financial crisis periods.

Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure

This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 85 countries; we focus on international linkages that may have allowed the crisis to spread across countries. Our model of the cross-country incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. The causes we consider are both national (such as equity market run-ups that preceded the crisis) and, critically, international financial and real linkages between countries and the epicenter of the crisis. We consider the United States to be the most natural origin of the 2008 crisis, though we also consider six alternative sources of the crisis. A country holding American securities that deteriorate in value is exposed to an American crisis through a financial channel. Similarly, a country which exports to the United States is exposed to an American downturn through a real channel. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to find strong evidence that international linkages can be clearly associated with the incidence of the crisis. In particular, countries heavily exposed to either American assets or trade seem to behave little differently than other countries; if anything, countries seem to have benefited slightly from American exposure.

Model of Vector Controlled Induction Drive

The paper presents the model of vector controlled induction motor. Induction motor model is carried out in reference frame, fixed on stator. Elaborated model of the drive is suitable for investigation dynamics because output signals appear as real currents, flux linkages and other variables. Vector control law model is implemented for variables in synchronous reference frame; therefore controller operates with transformed variables. Structure of designed model reflects the real variable speed drive. Model of vector controlled induction drive comprise model of induction motor, feedback signals and blocks as well as speed and flux reference blocks and controllers for producing motor supply signals. Feedback blocks are used for calculation stator current vector in the rotor flux linkage reference frame. For flux and speed control are designed lag controllers. Between advantages of that model is additional simulation of current channel law.

POST-CRISIS EXCHANGE RATE REGIMES IN ASEAN: A NEW EMPIRICAL TEST BASED ON INTRA-DAILY DATA

The purpose of this paper is to investigate what affected the post-crisis exchange rates of three ASEAN countries: Singapore, Thailand and Malaysia. Our critical departure from previous studies is the use of intra-daily exchange rates. The use of the intra-daily data is useful in removing possible estimation biases which the choice of numéraire may cause. It also contrasts exchange rates when official intervention is active with those when it is not active. We find significant structural breaks in the correlations when the East Asian market is open, which suggest strong monetary and real linkages among the ASEAN countries.

Regime Changes and Dynamic Linkages in Major Securitized Real Estate Markets

This paper is a contribution to the literature in international real estate market volatility dynamics and linkages from an alternative perspective. We analyzes the dynamics and transmission of conditional volatilities with multiple structural changes in mean returns and volatility using the Bai and Perron (2003) methodology, across five major securitized real estate markets, employing a multivariate regime-dependent asymmetric dynamic covariance model (MRDADC) that allows the conditional matrix to be both time- and state-varying. Important contributions of this study are the findings of statistically significant variables that represent the multiple regime changes. When taken into consideration, they influence the return-volatility transmission across markets as well as time-varying asymmetric variances and covariance dynamics in our MRDADC representation.