Investor perceptions and equity-sovereign bond return correlation: revisiting the Mexican Peso Crisis

We investigate evidence of state-dependent correlation between Mexican Brady bond and Mexican Equity Fund returns between November 1990 and March 2000. During this timeframe, the Mexican capital market can be characterized by three distinct periods: pre-Peso crisis (November 1990–April 1993), the crisis years (May 1993–December 1996), and a period of recovery following the crisis. We find a statistical increase in correlation of returns from these instruments during the period surrounding the Peso crisis, and show that the correlation preceded the collapse of the Peso by 20 months. We also find that common fundamentals fail to explain the source of this correlation. However, using a regime switching model, state-dependent investor perceptions embedded in the Brady returns can explain the correlation pattern. Our evidence implies that time-varying correlation between debt and equity securities may be driven primarily by state-dependent investor perceptions about bond risk.     

Spillover and Cojumps Between the U.S. and Chinese Stock Markets

There is an urgent need to understand the spillover and cojump effects between the U.S. and Chinese stock markets. The paper finds that since July 2005, the U.S. stock market has caused short-run spillover effects on returns on the Chinese stock market. More specifically, price changes in the United States can be used to predict both closing-to-opening and closing-to-closing returns on the Chinese stock market on the next day. However, there is no significant volatility spillover between the two markets. Both markets have shown stronger cojump behavior since the subprime crisis. The return relationships between the two stock markets are robust.     

International equity market integration in a small open economy: Ireland January 1990-December 2000

We examine the relationship between the Irish, German, UK and U.S. equity markets. Our main finding is that the Irish equity market depends heavily on trading activity in the other markets but not vice versa. Significant return and volatility spillover effects occur in the direction of, but not from, the Irish market. We also find that dual listing in the form of American Depositary Receipts (ADRs) has an important role to play in these spillover effects. Our findings obtain throughout the sample, but are strongest for the period after the ERM crises and before the introduction of the euro.     

Market efficiency, the Mexican peso crisis, and the US bank stock returns: An application of the event parameter method

This paper examines the impact of the 1994 Mexican peso crisis on US bank returns using an event parameter approach. The event parameter approach explicitly predicts the stochastic return generating process on the occurrence or nonoccurrence of specific events. The event parameter method assumes that only the intercept term may vary between the estimation and analysis periods. Specifically, this study will examine two pairs of hypotheses, new information vs. information leakage and rational pricing vs. investor contagion, in the context of the 1994 Mexican peso and banking crisis. The empirical results support the new information hypothesis, which states that US stock prices reacted quickly to events related to the Mexican peso crisis. This research has also found evidence for bank contagion, although these did not spill over to other banks. The US government and international agencies acted promptly to contain the effect of the Mexican peso and banking crisis spreading to the US and to other Latin American countries.     

Transmission of Stock Returns and Volatility between the U.S. and Japan: Evidence from the Stock Index Futures Markets

In this paper, we examine the nature of transmission of stock returns and volatility between the U.S. and Japanese stock markets using futures prices on the S&P 500 and Nikkei 225 stock indexes. We use stock index futures prices to mitigate the stale quote problem found in the spot index prices and to obtain more robust results. By employing a two-step GARCH approach, we find that there are unidirectional contemporaneous return and volatility spillovers from the U.S. to Japan. Furthermore, the U.S.'s influence on Japan in returns is approximately four times as large as the other way around. Finally, our results show no significant lagged spillover effects in both returns and volatility from the Osaka market to the Chicago market, while a significant lagged volatility spillover is observed from the U.S. to Japan. This revised version was published online in August 2006 with corrections to the Cover Date.     

No Contagion, Only Interdependence: Measuring Stock Market Comovements

Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.     

Depositary Receipts, Country Funds, and the Peso Crash: The Intraday Evidence

We study the intraday impact of exchange rate news on emerging market American Depositary Receipts (ADRs) and closed-end country funds during the 1994 Mexican peso crisis. Peso exchange-rate changes affect prices and trading volumes of Latin American equities, and some closed-end fund behavior is consistent with "noise trader" theories of small investors. However, there is no evidence that peso depreciation triggers a significant sell-off of non-Mexican securities or that other non-Mexican trading patterns change at times of high peso news flow. Thus, the "Tequila Effect" is largely confined to price changes.     

Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements

This article explores the fundamental factors that affect cross-country stock return correlations. Using transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts (ADRs) and a matched-sample portfolio of U. S. stocks. We find that U. S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad-based market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations.     

Global financial crisis and emerging stock market contagion: A volatility impulse response function approach

By employing the volatility impulse response (VIRF) approach, this paper presents a general framework for addressing the extent of contagion effects between the BRICSs’ and U.S. stock markets and how the BRICSs’ stock markets have been influenced in the context of the 2007–2009 global financial crisis. Our empirical results show during the period of 2007–2009 global financial crisis, there are significant contagion effects from the U.S. to the BRICSs’ stock markets. Yet, the degree of stock market reactions to such shocks differs from one market to another, depending on the level of integration with the international economy. Besides, the strengthened degree of stock market integration among the U.S. and BRICS has adverse effect such that if the 2007–2009 global financial crisis occurs today it may result in heavier impact on stock market volatility nowadays compared to the crisis-era.     

The anatomy of sovereign risk contagion

The channels for the cross-border propagation of sovereign risk in the international sovereign debt market are analysed. Identifying sovereign credit events as extraordinary jumps in CDS spreads, we distinguish between the immediate effects of such events and their longer term spillover effects. To analyse “fast and furious” contagion, we use daily CDS data to conduct event studies around a total of 89 identified credit events in a global country sample. To analyse “slow-burn” spillover effects, we apply a multifactor risk model, distinguishing between global and regional risk factors. We find that “fast and furious” contagion has been primarily a regional phenomenon, whilst “slow-burn” spillover effects can often be global in scope, especially those of the recent European debt crisis. The global risk factors are found to be driven by investor risk appetites and debt levels, whilst the regional factors depend on economic fundamentals of countries within a region.     

Valuation impact of currency crises: Evidence from the ADR market

This study analyzes American depository receipts (ADR) performance surrounding the outbreak of major currency crises during the past decade. By employing event-study methodologies and multifactor pricing models, we find that the outbreak of a currency crisis is accompanied by a negatively significant abnormal return for the corresponding ADRs, even after controlling for variations in exchange rates. We also find significant upward shifts in the exchange rate exposure of ADRs when the home currency is switched from a “pegging” to a “floating” exchange rate regime. In addition, ADR-originating firms with larger sizes, greater proportions of U.S. market activities, and greater market liquidity have relatively less negative abnormal returns (ARs) and less significant upward shifts in currency exposure, implying that such firms are relatively better hedged against currency crises.     

Pricing of American Depositary Receipts under Market Segmentation

This article examines the pricing of American Depositary Receipts (ADRs) in a three-factor pricing model. A seemingly unrelated regression model is utilized to test the nonlinear parameter restriction implied by the model. It is found that, although ADRs are traded in the U.S. securities market, their returns are significantly affected by their respective home market factors rather than by U.S. market movements. While U.S. investors are exposed to incremental risk from foreign equity market, they do not command a risk premium. The findings suggest that (1) markets are segmented and ADR listing does not integrate world capital market and (2) ADRs behave more like a foreign security and ADR is an effective tool of global risk diversification for U.S. investors.     

The trade war's impact on the financial market: Observations from the historical global trade war - the Smoot Hawley Tariff Act

This study examines financial market reactions to political events that led to the passage and repeal of the Smoot–Hawley Tariff Act (SHTA) from the perspective of political uncertainty. The events were a series of debates and votes held by the U.S. House and Senate before the SHTA was signed into law in 1930 and repealed in 1934. These events increase political uncertainty about trade policy, thereby creating a unique setting to measure the impact of political uncertainty on financial market reactions. We find that each event resulted in an average loss of 3.6% in the U.S. aggregate stock market over a [−1, +1] three-day window. Such negative returns were observed at the firm level. Moreover, we find that firms with higher tariff protection performed significantly better than firms with lower tariff protection on nonevent dates. Furthermore, we discovered that trading volumes were significantly higher on event dates than on nonevent dates. Stock return volatility was significantly higher during the entire debating and voting period than during the 12 months preceding its inception and 6 months following the SHTA's passage into law. However, higher tariff protection was associated with lower return volatility outside the event window. Our findings show that political uncertainty events commanded the risk premium.     

Orange County Bankruptcy: Financial Contagion in the Municipal Bond and Bank Equity Markets

We examine the spillover wealth effects of the Orange County, California bankruptcy announcement in December 1994 on municipal bonds, municipal bond funds, and bank stocks. This bankruptcy is prominent because of unprecedented losses and because it was caused by a highly leveraged derivatives strategy rather than a shortage of tax revenues and excess spending. We find contagion in the bond market with significantly negative abnormal returns for municipal bond funds without direct exposure to Orange County and for non‐Orange County municipal bonds. In addition, our findings suggest the contagion spills over to the common stocks of investment and commercial banks that deal in or use derivatives; however, the equities of banks unexposed to derivatives are not affected.     

The 1994–1995 Mexican Currency Crisis and U.S. Bank Stock Returns

We investigate the impact of the 1994–1995 Mexican currency crisis on U.S. bank stock returns. We use a jump-diffusion model rather than a pure diffusion model to describe daily stock returns, because the public release of unexpected information generally is associated with discrete jumps in prices. Traditional event study models pool both announcement effects and trading effects and may lead to inefficient estimators. The jump-diffusion model can separate the impact of informed trading from unanticipated public announcements. Our results indicate that the variance of the jumps is large and increases with bank size and portion of loans to Mexico.     

The impact of the European sovereign debt crisis on banks stocks. Some evidence of shift contagion in Europe

This paper analyzes the influence of the recent European sovereign debt crisis on banks’ equity returns for 15 countries. Our data span the period December 14th 2007 - March 8th 2013 that encompasses several episodes of economic and financial turmoil since the collapse of the subprime credit market. Our contribution to the literature is twofold. First, we use an explicit multifactor model of equity returns extended with a sovereign risk factor. Second, we adopt a Smooth Transition Regression (STR) framework that allows for an endogenous definition of crisis periods and captures the changes in parameters associated with shift contagion. We find that the negative impact of the European sovereign debt crisis on banks’ equity returns has been mostly confined to European banks, whereas U.S. banks appear to be unharmed by its direct impact and may even have benefited from it. Besides, we find some evidence of shift contagion across Europe.     

波动溢出网络视角的金融风险传染研究

当前各类经济风险交叉关联,金融系统的风险溢出效应备受关注,为刻画我国金融系统性风险传染的路径特征,本文从波动溢出网络的视角分析金融系统内部的风险传染机制。首先使用广义动态因子模型对收益波动的共同波动率成分和特质性波动率成分进行区分。然后,根据货币市场、资本市场、大宗商品交易市场、外汇市场、房地产市场和黄金市场之间的特质性波动溢出效应,利用基于TVP-VAR模型的方差分解溢出指数分析金融系统波动溢出的动态联动性和风险传递机制。在分析方向性波动溢出效应的基础上,采用方差分解网络方法构建起信息溢出复杂网络,从网络视角分析金融系统内部的风险传染特征。实证研究发现,房地产市场和外汇市场的净溢出效应绝对值相较于其他市场更大,其受其他市场风险冲击的影响强于对外风险溢出效应,而股票市场的单向对外风险溢出效应强度最大。在波动溢出的基础上,进一步考虑股市波动率指数与其他市场波动率指数进行投资组合的资产配置权重,计算了波动率指数投资组合的最优组合权重和对冲策略。研究结论有助于更好地理解我国金融系统的风险传染机制,对监管机构加强宏观审慎监管、投资者规避投资风险具有重要意义。     

A multilateral approach to examining the comovements among major world equity markets

This study investigates the comovement in stock indices among major developed markets, where Morgan Stanley Capital International (MSCI) indices are employed for the purposes of the study. We employ a model that accommodates multilateral international impacts on equity index movements. The empirical results reveal the existence of significant international transmission effects among these major world markets, both in terms of returns and volatility, and mostly in a positive direction. The U.S. market, as expected, is the leading market in the sense that it has the most pervasive and significant impact on all markets across continents. However, the U.S. market exhibits a different relationship with European markets from that with Asia-Pacific markets. The evidence also suggests that strong regional transmission effects exist. A further investigation using the extended model reveals that the linkages between U.S. and European markets are driven by positive global common forces and by negative international competitive effects. On the other hand, the U.S. and Asian markets are linked through positive global common forces and positive international contagion effects. The United States, Canada, and the U.K. are the three markets that still demonstrate contagion influence over countries outside its own region. The Asia-Pacific markets are more susceptible to contagion effects. Finally, it is interesting to find that Japanese market performance became more contagious toward other markets during the Asian financial crisis period.     

Returns,Volatilities, and Correlations Across Mature,Regional, and Frontier Markets: Evidence from South Asia

We investigate returns, volatilities, and correlations across mature, dominant regional, and frontier equity markets. Standard & Poor's 500 is chosen as a mature equity market; India is chosen as a dominant regional market; and Bangladesh, Pakistan, and Sri Lanka are chosen as frontier markets. Our empirical tests show that the frontier markets remain fundamentally decoupled from the mature markets during normal market periods. During turbulent times, the contagion effects from the mature to the frontier markets become more pronounced. The results suggest that the dominant regional market plays a key role in disseminating shocks across the frontier markets during normal periods; during the turbulent recent financial crisis period, a similar contagion is not observed.     

Capture the contagion network of bitcoin – Evidence from pre and mid COVID-19

COVID-19 is the first global scale crisis since the inception of Bitcoin. We compare the contagion phenomenon of Bitcoin and other financial markets or assets pre and during the COVID-19 shock in both contemporaneous and non-contemporaneous manner. This paper uses the directed acyclic graph (DAG), spillover index, and network topology to provide strong evidence on the directional contagion outcomes of Bitcoin and other assets. The empirical results show that the contagion effect between Bitcoin and developed markets is strengthened during the COVID-19 crisis. Particularly, European market has a dominant role. Excluding Bitcoin’s own shocks, United State and European markets are the main contagion sources to Bitcoin. European market also works as a intermediary to deliver infectious from United State and market fear. The findings show that gold always has contagion effect with Bitcoin, while gold, US dollar and bond market are the contagion receivers of Bitcoin under the shock of COVID-19. The empirical results further proved the safe haven, hedge and diversifier potential of Bitcoin in economic stable time, but also shows that the sustainability of these properties is undermined during the market turmoil.