Significant Contagion Effects Research Articles

Financial market information flows when counteracting rogue states: The indirect effects of targeted sanction packages

This study investigates how financial sanctions packages targeting Russia influenced traditional information flow dynamics with other international financial markets and products. While providing empirical evidence regarding the use of payment systems and finance as weapons of war, it is crucial to understand if the market's response to international sanctions diminished as expectations shifted over time. Results, supported by robustness testing procedures, indicate important dynamic information flows relating to specific sanctions after the onset of the Russia-Ukraine war. In particular, those sanctions relating to the exclusion of Russia from the SWIFT payment system and those targeting banks and private wealth resulted in significant contagion effects sourced from all Russian markets examined. Such influence, however, is found to moderate and dilute as investors reconstruct their expectations and valuations. While targeted sanctions appear to impose intended market isolation, it is also associated with significant contagion effects. Although such secondary effects dissipate, they should be seen as important when implementing further targeted sanction packages.

Intelligent design: stablecoins (in)stability and collateral during market turbulence

How does stablecoin design affect market behavior during turbulent periods? Stablecoins attempt to maintain a “stable” peg to the US dollar, but do so with widely varying structural designs. The spectacular collapse of the TerraUSD (UST) stablecoin and the linked Terra (LUNA) token in May 2022 precipitated a series of reactions across major stablecoins, with some experiencing a fall in value and others gaining value. Using a Baba, Engle, Kraft and Kroner (1990) (BEKK) model, we examine the reaction to this exogenous shock and find significant contagion effects from the UST collapse, likely partially due to herding behavior among traders. We test the varying reactions among stablecoins and find that stablecoin design differences affect the direction, magnitude, and duration of the response to shocks. We discuss the implications for stablecoin developers, exchanges, traders, and regulators.

A Causal Analysis of Market Contagion: A Double Machine Learning Approach

Making reliable causal inferences is integral to both explaining past events and forecasting the future. Although there are various theories of economic causality, there has not yet been a wide adoption of machine learning techniques for causal inference within finance. One recently developed framework, double machine learning, is an approach to causal inference that is specifically designed to correct for bias in statistical analysis. In doing so, it allows for a more precise evaluation of treatment effects in the presence of confounders. In this article, the author uses double machine learning to study market contagion. He considers the treatment variable to be the weekly return of the S&P 500 Index below a specific threshold and the outcome to be the weekly return in a single major non-US market. In analyzing each non-US market, the other non-US markets under consideration are used as confounders. The author presents two case studies. In the first, outcomes are observed in the same week as the treatment is observed and, in the second, in the week after. His results show that, in the first case study, sizable and statistically significant contagion effects are observed but somewhat diluted due to the presence of confounders. In contrast, in the second case study, more ambiguous contagion effects are observed and the level of statistical significance is measurably lower than those observed in the first case study, indicating that contagion effects are most clearly transmitted in the same week that the dislocation in the S&P 500 occurs.

Contagion effect of migration fear in pre and European refugee’s crisis period: evidence from multivariate GARCH and wavelet empirical analysis

To test the contagion effect of fear migration between countries, and to show its causality direction, our paper contributes to the economic literature by providing a new study based on migration fear indices quarterly data of France, Germany, United Kingdom and United States spanning period 1990–2019. Our empirical strategy is based on dynamic conditional correlation GARCH model and continuous wavelet transform analysis. Our results show a significant contagion effect of fear migration between the selected countries in pre and at the European Refugees crisis. The main findings of this work are changes level of conditional correlation in the two subsample periods, and changes in the arrow’s directions in red space of the phase difference between each two fear migration series. These findings indicate that European Refugees crisis changes the relationship between European Union countries and USA, and the Brexit changes the European people behavior towards migrants and refugees. Our findings offer a new directions and tracks in the international relations to the policy makers, moreover it calls into question the various studies examining economic interdependence and the contagion effect of financial crises and policies events on the different markets.

Aging Does Not Enhance Social Contagion Effect.

Studies on the social contagion of memory show that it is possible to create false memories from the wrong responses from other people without requiring their physical presence. The current study examined age differences between false memories via the modified social contagion paradigm. Twenty older and twenty younger adults were shown six household scenes and were exposed to the erroneous memory reports of an implied confederate who was not physically present. The presentation time of the scenes and the typicality of the contagion items were manipulated. The participants watched each scene individually and then took turns giving their recall responses with the responses belonging to a fictional participant provided by written cards. The results in a final individual recall test indicated a significant contagion effect in both groups of participants. Additionally, an effect of the typicality of the contagion items was observed, such that the more typical items produced more contagion than the less typical items. In relation to true recall, the older adults remembered significantly fewer items from the scenes than the younger ones and obtained a lower score in the word list subtest of the Weschler Memory Scale. Although the older group had an episodic memory deficit, they were not more susceptible to being affected by the wrong responses of other people than younger group.

Contagion of Temporal Discounting Value Preferences in Neurotypical and Autistic Adults

Neuroeconomics paradigms have demonstrated that learning about another’s beliefs can make you more like them (i.e., contagion). Due to social deficits in autism, it is possible that autistic individuals will be immune to contagion. We fit Bayesian computational models to a temporal discounting task, where participants made decisions for themselves before and after learning the distinct preferences of two others. Two independent neurotypical samples (N = 48; N = 98) both showed a significant contagion effect; however the strength of contagion was unrelated to autistic traits. Equivalence tests showed autistic (N = 12) and matched neurotypical N = 12) samples had similar levels of contagion and accuracy when learning about others. Despite social impairments being at the core of autistic symptomatology, contagion of value preferences appears to be intact.

Financial Crises, Macroeconomic Variables, and Long-Run Risk: An Econometric Analysis of Stock Returns Correlations (2000 to 2019)

This paper focuses on four major aggregate stock price indexes (SP 500, Stock Europe 600, Nikkei 225, Shanghai Composite) and two “safe-haven” assets (Gold, Swiss Franc), and explores their return co-movements during the last two decades. Significant contagion effects on stock markets are documented during almost all financial crises; moreover, in line with the recent literature, the defensive role of gold and the Swiss Franc in asset portfolios is highlighted. Focusing on a new set of macroeconomic and financial series, a significant impact of these variables on stock returns correlations is found, notably in the case of the world equity risk premium. Finally, long-run risks are detected in all asset portfolios including the Chinese stock market index. Overall, this empirical evidence is of interest for researchers, financial risk managers and policy makers.

An assessment of how COVID-19 changed the global equity market

This paper investigates the impact of the U.S and China equity markets on global equity markets during the COVID-19 pandemic. Specifically, we compare the contagion of global equity markets, their volatility persistence, and the volatility spillover effects from the U.S and China to other countries in pre-pandemic and during-pandemic periods. We find evidence of significant contagion effects from the U.S and China stock markets during the COVID-19 pandemic period. Further, we observe that the nature of stock index volatility does not change and there is weak evidence for volatility spillover effects during the pandemic period.

Research on the Contagious Effect of Firm Financialization

Considering the characteristics of China’s relational society, this paper analyzes why listed companies are keen on financial asset allocation from the perspective of relationship network, an informal institution. No matter from what angle to explore the deep-seated reasons why firms are keen on financial asset allocation, it is difficult for us to bypass two questions: One is why the phenomenon of firm financialization is so common; the other is why the degree of firm financialization is deepening day by day. We will analyze the relationship between the relationship network and the above problems from the following aspects, which is also the logical starting point of this paper: From the perspective of breadth, financialization belongs to the category of investment decision-making, including individual financialization (financialization of a single firm), local financialization (financialization of multiple firms in the same region or industry), and systemic financialization (financialization of firms in all regions or industries), which follows a diffusion path from individual, local, to systemic; from the depth, there are three levels of financialization, namely, low financialization, high financialization, and excessive financialization, which follows a development path from low, high, to excessive.This paper analyzes the contagion effect and economic consequences of firm financialization under the framework of board network. It is found that when embedded in the board network, the financialization of listed companies in China has a significant contagion effect. At the same time, the contagion effect is significantly heterogeneous due to the fact that the board network connects the registered place, industry and actual human type of the firm, and the economic policy uncertainty aggravates the contagion effect to a certain extent. Further research shows that the contagion effect of firm financialization embedded in the board network leads to the decline of industrial investment rate, while the improvement of corporate governance is difficult to effectively alleviate the inhibitory effect; at the same time, the contagion effect has an inverted U-shaped impact on firm value. The direct policy implication of this paper is that firms should treat the board network prudently, especially carefully learning and imitating the financial experience of connecting firms. At the same time, the regulatory authorities can start from the board network to solve the problem of “from real to virtual”.The contribution of this paper is mainly reflected in the following aspects: On the one hand, the existing research mainly analyzes the influencing factors and economic consequences of firm financialization from the perspective of individual, but does not take into account the informal system. We try to analyze the interaction between firms in financialization from the perspective of relationship network, so as to enrich the existing theoretical research. On the other hand, this paper finds that the contagion effect of firm financialization caused by the board network has aggravated the decline of industrial investment rate, which provides new evidence for further evaluating the value of board network.

Who drives the dance? Further insights from a time‐frequency wavelet analysis of the interrelationship between stock markets and uncertainty

AbstractUsing multivariate continuous wavelet tools this paper empirically investigates the strength and the magnitude of the relation between two measures of uncertainty, namely economic policy uncertainty index and implied volatility index, and stock market returns in Europe and United States. The multiple wavelet coherency not only highlights a significant contagion effect between the US and the European stock markets in times of crisis, but also indicates that the intensity of the interdependence between the stock markets and uncertainty indices is more persistent in times of stress and crisis periods. The results also indicate that, both in the U.S. and Europe, when partial coherencies are significant, the partial phase‐differences consistently highlight a negative co‐movement between the stock markets returns and their corresponding implied volatilities, with the implied volatility indices leading the stock markets for most of the time span and across all frequency bands at which the stocks and the fear indices have co‐moved significantly. The wavelet partial gain suggests that the European stock market is relatively more resilient than the U.S. stock market.

The Financial Market Effects of International Aviation Disasters

The spread of misinformation with regards to aviation disasters continues to be a point of concern for aviation companies. Much of this information usually surrounds speculation based on the cause and responsibility attributed to the incident, implicitly possessing the potential to generate significant financial market price volatility. In this paper, we investigate a number of stylised facts relating to the effects of airline disasters on aviation stocks, while considering contagion effects, information flows and the sources of price discovery within the broad sector. Results indicate a substantially elevated levels of share price volatility in the aftermath of aviation disasters, while cumulative abnormal returns present sharp under performance of the analysed companies relative to international exchanges. When considering an EGARCH analysis, we observe that share price volatility appears to be significantly influenced by the scale of the disaster in terms of the fatalities generated. Significant contagion effects upon the broad aviation index along with substantial changes in traditional price discovery channels are also identified. The role that the spread of information on social media, whether it be correct or of malicious origins, cannot be eliminated as an explanatory factor of these changing dynamics over time and region.

The financial market effects of international aviation disasters

The spread of misinformation with regards to aviation disasters continues to be a point of concern for aviation companies. Much of this information usually surrounds speculation based on the cause and responsibility attributed to the incident, implicitly possessing the potential to generate significant financial market price volatility. In this paper, we investigate a number of stylised facts relating to the effects of airline disasters on aviation stocks, while considering contagion effects, information flows and the sources of price discovery within the broad sector. Results indicate a substantially elevated levels of share price volatility in the aftermath of aviation disasters, while cumulative abnormal returns present sharp under-performance of the analysed companies relative to international exchanges. When considering an EGARCH analysis, we observe that share price volatility appears to be significantly influenced by the scale of the disaster in terms of the fatalities generated. Significant contagion effects upon the broad aviation index along with substantial changes in traditional price discovery channels are also identified. The role that the spread of information on social media, whether it be correct or of malicious origins, cannot be eliminated as an explanatory factor of these changing dynamics over time and region.

Modeling Co-Movement among Different Agricultural Commodity Markets: A Copula-GARCH Approach

The aim of this research is to explore the volatility contagion among different agricultural commodity markets. For this purpose, this research make use of the copula-GARCH (Generalized Autoregressive Conditional Heteroskedasticity) model for the daily spot prices of six major agriculture grain commodities including corn, wheat, soybeans, soya oil, cotton, and oat over the period from 2000 to 2019. Our results provide evidence that significant contagion effects and risk transmissions exist among different agricultural grain commodity markets, suggesting that potential speculation effects on one agricultural market could be contagious for another agricultural market and result an increase in volatility in agricultural product markets. Second, agricultural commodities appears to co-move symmetrically. We also find substantial extreme co-movements among agricultural commodity markets. This indicates that agricultural commodity markets tend to crash (boom) together during extreme events. Moreover, after the food crisis, contagion effects and risk transmissions among different agricultural commodity markets increased substantially. Fourth, we find that the strongest contagion effects and risk transmissions are between corn and soybeans, and the weakest contagion effects and risk transmissions are between soya oil cotton and between cotton and oat. Last, we document that the co-movement varies over time. Our findings hold important implications for modeling the co-movement by the copula-GARCH approach.

From financial markets to Bitcoin markets: A fresh look at the contagion effect

This article studies contagion effects between traditional financial markets, represented by five equity indices and the EUR, USD, GBP, and JPY centralized Bitcoin markets. We apply a regime switching skew-normal model of asset returns that distinguishes between linear and non-linear contagion and also structural breaks in the periods. We find significant contagion effects from financial to Bitcoin markets in terms of both correlation and co-skewness of market returns. Our results also indicate that during crisis periods, risk-averse investors tend to move away from risky Bitcoin markets towards safer financial markets.

Spillovers in Sub-Saharan Africa’s Sovereign Eurobond Yields

ABSTRACT This study investigates the possibility of spillovers among Sub-Saharan African (SSA) eurobonds from January 2015 to June 2017 using secondary market yields. Our results indicate significant contagion effects among these bonds, effects that prove sensitive to major economic events and news announcements. They also suggest that less resilient economies transmit more to and receive less spillovers from their peers. SSA eurobond issuers can therefore increase their influence over the performance of their securities on secondary markets by mitigating their vulnerability to these effects. Besides strong macroeconomic fundamentals, an improvement in transparency and information disclosure is required in order to curb the asymmetry of information underlying investors’ behavior-based spillovers and contagion, which supports to a certain extent the market discipline hypothesis in the case of SSA eurobonds.

Analyzing Contagion Effect in Markets During Financial Crisis Using Stochastic Autoregressive Canonical Vine Model

Using the multivariate dynamic framework, we study the contagion effect through the change in the dependence structure of major stock markets of the USA, China, Japan, Russia, Hong Kong and India, during the recent (2015) slowdown in China market, the financial crisis called the subprime crisis (2008) of the USA and the Russian flu (1998). The dependence structures in these markets are captured by applying the time-varying C-Vine copula model combined with the AR(1)-GJR-GARCH(1,1) (autoregressive Glosten–Jagannathan–Runkle generalized autoregressive conditional heteroscedasticity) model. At first, we apply the AR(1)-GJR-GARCH(1,1) model to specify the marginal distribution of returns from the market indices and subsequently we apply the time-varying C-Vine (Canonical Vine) copula to estimate the dependence structure among these markets in pre and post phases of the financial crisis. The empirical findings establish the existence of contagion effect in these markets during the periods of depression. Clayton copula turns out to be the best fit copula after the China slowdown in all cases except for China–Russia pair, indicating an increased lower tail dependence in the post crisis period. The subprime crisis witnessed a significant increase in Kendall’s tau and its time-varying behavior in all pairs of countries except USA–China where a static dependence structure is observed. The same phenomena are observed during the Russian flu in Russia–India, Russia–USA and Russia–Japan pairs indicating a significant contagion effect. These empirical findings have significance in risk management for banks and financial intermediaries which invest majorally in the global markets.

Contagion, volatility persistence and volatility spill-overs: The case of energy markets during the European financial crisis

The aim of this paper is to investigate if and to what extent events in financially troubled EU markets (Greece, Ireland and Portugal) affected energy prices during the EU financial crisis. More specifically, (i) we test for contagion effects of bond prices on energy/commodity prices, (ii) we examine whether the nature of energy price volatility is affected and (iii) we investigate whether bond volatility from the financially distressed EU markets spills over to energy/commodity return volatility. Our results indicate the existence of significant contagion effects; notable changes in the nature of energy/commodity volatility during the EU financial crisis; and spill-over effects. The results are robust to the use of short-term yields instead of long-term bond price changes, and to the inclusion of Spain and Italy in the sample.

The information content of issuer rating changes: Evidence for the G7 stock markets

We study the firm-specific and intra-industry stock market effects of issuer credit rating changes and negative watch list placements for the G7 countries. We show that both the information content and the information transfer effects of these rating signals differ considerably in terms of magnitude and in terms of direction across the G7 countries. In particular, conditional on the type of rating change we find significant contagion effects for the US, the UK and Italy, but not for the other G7 countries. Moreover, we show that in some countries abnormal industry portfolio returns associated with rating downgrades and negative watch list signals tend to be more negative for more concentrated and more heavily levered industries. Overall, our results shed new light on country-specific differences in the relevance of credit ratings as risk indicators from an equity investor's perspective, and they may also be of interest to both risk managers and financial market supervisors striving to develop more accurate credit risk models and to better assess the systemic relevance of credit ratings.

Extremal dependence tests for contagion

ABSTRACTA new test for financial market contagion based on changes in extremal dependence defined as co-kurtosis and co-volatility is developed to identify the propagation mechanism of shocks across international financial markets. The proposed approach captures changes in various aspects of the asset return relationships such as cross-market mean and skewness (co-kurtosis) as well as cross-market volatilities (co-volatility). Monte Carlo experiments show that the tests perform well except for when crisis periods are short in duration. Small crisis sample critical values are calculated for use in this case. In an empirical application involving the global financial crisis of 2008–2009, the results show that significant contagion effects are widespread from the US banking sector to global equity markets and banking sectors through either the co-kurtosis or the co-volatility channels, reinforcing that higher order moments matter during crises.

Has Eurosceptic Mobilization Become More Contagious? Comparing the 2009 and 2014 EP Election Campaigns in The Netherlands and France

With the lingering Euro crisis, personalized competition for the Commission presidency, and a surge of Eurosceptic parties, the 2014 European Parliament elections took place against an unknown level of European Union politicization. How does this changing context affect the supply side of party competition on European issues in EP election campaigns? This article compares the 2014 and 2009 EP elections in two EU founding members with high electoral support for radical left and radical right Euroscepticism—France and the Netherlands. We study publically visible patterns of partisan mobilization in the written news media with semi-automated content analyses. The data indicate that visible party mobilization on EU issues was on average not significantly higher in 2014. While particularly mainstream and especially incumbent parties publically mobilize on European issues during both campaigns, the radical right’s mobilization efforts have become more visible during the 2014 elections. Examining the temporal dynamics within electoral campaigns, we show that the Eurosceptic fringes exhibit significant contagion effects on the mainstream parties, but that the extent of this contagion was surprisingly lower in the 2014 campaign. As a result, the increasing EU politicization between the 2009 and 2014 electoral contests has not resulted in an enhanced and more interactive supply of partisan debate about Europe.