Transmission Of Financial Stress Research Articles

Financial stress spillover across Asian Countries

AbstractThis paper uses fractional integration techniques to explore the stochastic properties of the Financial Stress Indices (FSIs) of 10 Asian countries, further investigating the bilateral linkages between them to ascertain how financial stress spreads among countries in the region. For the FSIs of each country, the results show that all the estimated orders of integration are in the interval (0, 1) implying fractional integration and a long memory pattern. Thus, shocks will have transitory though long‐lasting effects. For the cross‐country spillovers of the FSIs, we find that convergence is satisfied in all cases with values of the differencing parameter around 0 and thus showing short memory behavior. It is worth noting that for the larger economies in the region, Japan and China, financial stress transmission between Japan and the smaller economies was faster than with respect to China. Overall, the results provide valuable information on the financial market activity of the countries in the region. To check for the robustness of the baseline results we also use systemic risk measures for these countries, CoVaR with the results showing evidence of fractional integration for the individual series, with all values of the differencing parameter in the range (0, 1). For convergence, there is a substantial reduction in the degree of integration, though the results are not as clear as with the FSIs.

Financial Stress Transmission from Sovereign Credit Market to Financial Market: A Multivariate FIGARCH-DCC Approach

This study examines the interdependence between the daily eurozone sovereign credit default swaps (CDS) index and four financial market sectors such as banking CDS market (CDSb), underlying sovereign market (BONDs), stock market (BMI) and future interest rate benchmark of the bunds obligation (EUROBOBL). Focusing on different phases of the sovereign debt crises, the aim of this article is to examine how the dynamics of correlations between the CDSs and financial market indicators evolved from 20 September 2011 to 12 February 2016. To this end, we adopt a dynamic conditional correlation (DCC) model into a multivariate fractionally integrated generalized ARCH (FIGARCH) framework, which accounts for long memory and time-varying correlations. The empirical findings indicate a general pattern of decrease and increase in correlations during the phases of the sovereign debt crisis, suggesting the spillover effect and different vulnerability of the CDS index and financial market indicators.

The Role of Contagion in the Transmission of Financial Stress

I examine the relevance of contagion in explaining financial distress in the US banking system by identifying the component of bank level probabilities that is due to contagion. Identification is achieved after controlling for macrofinancial and bank specific shocks that have similar consequences to contagion. I use a Bayesian spatial autoregressive model that allows for time-dependent network interactions, and find that bank default likelihoods depend, to a large extent, on peer effects that account on average for approximately 35 per cent of total distress. Furthermore, I find evidence of significant heterogeneity amongst banks and some institutions to be systemically more important that others, in terms of peer effects. JEL Classification: E44, G01, C11, G21

Transmission of financial stress in Europe: The pivotal role of Italy and Spain, but not Greece

This paper proposes a stochastic volatility model to measure sovereign financial distress. It examines how key European sovereign CDS affect each other, and particularly Germany, Spain and Italy as the core EU countries, after controlling for common and systematic risks. It is found that extreme bad news led to persistent and nearly permanent effects on stochastic volatility and, consequently, has an impact on sovereign CDS spreads. The stability of Germany is a close proxy for the resilience of the euro area as markets use Germany's sovereign CDS as a hedge for systemic risk. Although most of the CDS changes for Germany during 2009-16 were due to idiosyncratic factors, market developments in Italy and Spain contributed significantly, probably due to their relative size and importance in the region. Changes in Greece's sovereign CDS had no significant effect on core's European sovereign CDS despite initial widespread concerns about such linkages. Spain and Italy show a notable co-dependence in explaining each other's volatility, supporting their relative importance.11We would like to thank to the editor of the journal and two anonymous referees for very useful comments. We are also grateful for useful discussions and comments received from participants at seminars organized at the IMF, MIT, the 2015 World Finance Conference and the 2015 Paris Financial Management Conference.

Financial Interdependence and Contagion: The Transmission of Financial Stress from the United States to Latin America

In this paper I analyze how has the financial interdependence and contagion among LAC-6 countries and the United States changed in the last 15 years, and the transmission channels of these cross-market linkages. To do so, I use a two-stage approach in which I first estimate financial interdependence and contagion as transmission coefficients of financial stress indexes in a rolling window auto-regressive model, and then assess the channels that explain these linkages. Results show that, in average, around 34% of the financial stress in the United States has been transmitted to LAC-6 countries over the last 15 years. However, this financial interdependence is much larger with Chile, Colombia, Mexico, and Peru (ranges around 45%) and a significant increase in the transmission of stress is observed during the 2008 crisis. Both trade and financial linkages have a significant impact in the transmission of financial stress. Nonetheless, the effect of trade linkages is always larger than the one of the financial linkages, pointing to this mechanism as the main channel of financial interdependence and contagion between LAC-6 countries and the United States during the last 15 years.

The Intergenerational Transmission of Financial Stress and Relationship Outcomes

Numerous studies have focused on the intergenerational transmission of poverty, financial stress, and family functioning. Other research has shown how financial stressors can predict various family processes, including parent–child interactions, family conflict, and couple communication, and relationship outcomes, including marital stability and satisfaction. This study shows continued evidence that financial stress from the male and female partner's family of origin may predict marital dissatisfaction using dyadic data techniques. Also, an exploration of indirect paths also found that the presence of current financial stress partially mediates these associations.

Financial Stress Transmission in EMU Sovereign Bond Market Volatility: A Connectedness Analysis

This paper measures the connectedness in EMU sovereign market volatility between April 1999 and January 2014, in order to monitor stress transmission and to identify episodes of intensive spillovers from one country to the others. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yilmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each country and apply panel model techniques to investigate its determinants. Finally, to gain further insights, we examine the time varying behaviour of net pair-wise directional connectedness at different stages of the recent sovereign debt crisis.

Does linkage fuel the fire? The transmission of financial stress across the markets

This paper develops an indicator of financial stress transmission, called Financial Stress Spillover Index (FSSI), to monitor the condition of financial system and to identify periods of excessive spillover that may lead to financial instability. Specifically, using the “spillover index” approach of Diebold and Yilmaz (2012), we modify and extend the financial stress indices proposed by Oet et al. (2011) to track both total and directional stress spillovers across the U.S. equity, debt, banking, and foreign exchange markets. Unlike other previous studies, the important linkages among these four major financial sectors in an interconnected world are directly taken into account by considering the average and time-varying connectedness of each individual market. The evidence suggests that there are important stress episodes and fluctuations across markets; the total cross-market stress spillovers were rather limited until the onsets of financial crises. As the crises intensified, so too did the financial stress spillovers; with significant stress carrying over from debt and equity markets to the others. In addition, our results indicate that FSSI has a significant predictive power for the economic activity and provides useful information for dating financial crisis.

Transmission of Financial Stress in Europe: The Pivotal Role of Italy and Spain, but not Greece

This paper proposes a stochastic volatility model to measure sovereign financial distress. It examines how key European sovereign credit default swap (CDS) spreads affect each other; specifically, the paper analyses the volatility structure of Germany, Greece, Ireland, Italy, Spain and Portugal. The stability of Germany is a close proxy for the resilience of the euro area as markets use Germany’s sovereign CDS as a hedge for systemic risk. Although most of the CDS changes for Germany during 2009–12 were due to idiosyncratic factors, market developments in Italy and Spain contributed significantly, likely due to their relative importance in the region. Changes in Greece’s sovereign CDS had no significant effect on Germany’s sovereign CDS despite initial widespread concerns about such linkages. Spain and Italy show a notable co-dependence in explaining each other’s volatility while Germany also plays an important role. It is found that extreme bad news led to persistent and nearly permanent effects on the stochastic volatility of European sovereign CDS spreads.

Transmission of Financial Stress in Europe: The Pivotal Role of Italy and Spain, But Not Greece

Transmission of Financial Stress in Europe: The Pivotal Role of Italy and Spain, But Not Greece

Transmission of Financial Stress Under Regime-Switching: Evidence from a MENA Country

A general consensus among studies focusing on the transmission of crises from advanced economies to emerging markets indicates that the extent of pass-through of financial stress is linked to the depth of financial linkages between advanced and emerging economies. Using the Financial Stress Index (FSI) database developed by Balakrishnan et al (2009), the present paper attempts to investigate the financial transmission from a particular advanced economy, namely the USA, to an emerging economy from MENA region, namely Egypt. The investigation of particular interactions between a single advanced economy’s financial component variables and the FSI of emerging economy within a regime-switching framework constitutes the major feature of this study that distinguish it from earlier works. Rather than ascribing the intensity of the index to some pre-set zero-one type of classification, the Markov switching approach allows the flexibility of an endogenously defined, thus data-dependent intensity. Monthly observations covering 2001.7-2009.10 periods are utilized in this study. Preliminary findings indicates that linearity of FSI series can be rejected in favor of the 2-regime Markov Switching framework. Among explanatory variables, the TED spread defined as the difference between US interbank rates and the yield on Treasury bills, the U.S stock market returns, U.S stock market volatility have all been found influential in driving up the Egyptian FSI. On the other hand, foreign exchange market volatility defined as month of month growth rate of USD turned out to be insignificant.

The Transmission of Financial Stress From Advanced to Emerging Economies

This paper studies how financial stress is transmitted from advanced to emerging economies, using a new financial stress index for emerging economies. An episode of financial stress is defined as a period when the financial system's ability to intermediate may be impaired. Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies. In line with this pattern, the unprecedented spike in financial stress in advanced economies elevated financial stress across emerging economies above levels seen during the Asian crisis, but with significant cross-country variation. The extent of pass-through of financial stress is related to the depth of financial linkages between advanced and emerging economies. The paper finds that higher current account and fiscal balances do little to insulate emerging economies from the transmission of financial stress in advanced economies. However, they may help dampen the impact on the real sector of emerging economies and help reestablish financial stability and foreign capital inflows once financial stress subsides.

The Transmission of Financial Stress from Advanced to Emerging Economies

This paper studies how financial stress is transmitted from advanced to emerging economies, using a new financial stress index for emerging economies. An episode of financial stress is defined as a period when the financial system's ability to intermediate may be impaired. Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies. In line with this pattern, the unprecedented spike in financial stress in advanced economies elevated financial stress across emerging economies above levels seen during the Asian crisis, but with significant cross-country variation. The extent of pass-through of financial stress is related to the depth of financial linkages between advanced and emerging economies. The paper finds that higher current account and fiscal balances do little to insulate emerging economies from the transmission of financial stress in advanced economies. However, they may help dampen the impact on the real sector of emerging economies and help reestablish financial stability and foreign capital inflows once financial stress subsides.