Testing for financial contagion based on a nonparametric measure of the cross‐market correlation

When contagion is defined as a significant increase in market comovement after a shock to one country, we propose a test for financial contagion based on a nonparametric measure of the cross-market correlation. Monte Carlo simulation studies show that our test has reasonable size and good power to detect financial contagion, and that Forbes and Rigobon's test (2002) is relatively conservative, indicating that their test tends not to find evidence of contagion when it does exist. Applying our test to investigate contagion from the 1997 East Asian crisis and the 2007 Subprime crisis, we find that there existed international financial contagion from the two financial crises.     

Measuring financial contagion: A Copula approach

This paper models dependence with switching-parameter copulas to study financial contagion. Using daily returns from five East Asian stock indices during the Asian crisis, and from four Latin American stock indices during the Mexican crisis, it finds evidence of changing dependence during periods of turmoil. Increased tail dependence and asymmetry characterize the Asian countries, while symmetry and tail independence describe the Latin American case. Structural breaks in tail dependence are a dimension of the contagion phenomenon. Therefore, the rejection of the correlation breakdown hypothesis should not be considered, without further investigation, as evidence of a stable dependence structure.     

Covid-19 pandemic and spillover effects in stock markets: A financial network approach

This paper examines the impact of the COVID-19 pandemic on 51 major stock markets, both emerging and developed. We isolated the countries susceptible to shock transmissions, and evaluated countries with immunity, during the lockdown. Specifically, using dependence dynamics and network analysis on a bivariate basis, we identify volatility and contagion risk among stock markets during the COVID-19 pandemic. The empirical findings add to the existing body of literature, given that previous work has not placed emphasis on network topologic metrics when it comes to financial networks, specifically during the COVID-19. The evidence shows instant financial contagion a result of the lockdown and the spread of the novel coronavirus. The methodological framework outlines important information for investors and policymakers on using financial networks to improve portfolio selection, by placing an emphasis on assets according to centrality.     

Testing financial contagion on heteroskedastic asset returns in time-varying conditional correlation

We suggest that there is a significant relationship between cross-market comovement and time varying volatility. The time-varying component of cross-market dependence is attributed to the intertemporal risk-return adjustment by rational, risk-averse investors who systematically revise their expectation in response to changing volatility. To reflect the time-varying component of cross-market dependence, we propose a time-varying correlation test for contagion. Our results show that out of the countries reporting contagion evidence under the constant correlation test, none of the countries exhibits contagion evidence from the 1997 Asian crisis. We conclude that a high level of cross-market correlation during a crisis reported as contagion evidence under the standard constant correlation test is mostly due to the high level of cross-market co-movement resulting from the intertemporal risk-return adjustment.     

Global financial crisis and emerging stock market contagion: A multivariate FIAPARCH–DCC approach

This paper empirically investigates the contagion effects of the global financial crisis in a multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) dynamic conditional correlation (DCC) framework during the period 1997–2012. We focus on five most important emerging equity markets, namely Brazil, Russia, India, China and South Africa (BRICS), as well as USA during different phases of the crisis. The length and the phases of the crisis are identified based on both an economic and a statistical approach. The empirical evidence does not confirm a contagion effect for most BRICS during the early stages of the crisis, indicating signs of isolation or decoupling. However, linkages reemerged (recoupled) after the Lehman Brothers collapse, suggesting a shift on investors' risk appetite. Moreover, correlations among all BRICS and USA are increased from early 2009 onwards, implying that their dependence is larger in bullish than in bearish markets. These findings do not show a pattern of contagion for all BRICSs' markets that could be attributed to their common trade and financial characteristics and provide important implications for international investors and policymakers.     

Dependence patterns among Asian banking sector stocks: A copula approach

Asian banks have recorded 22 banking crisis between 1945 and 2008 and its total share of years in a banking crisis since 1945 is 12.4%, the highest compared to all regions. Interestingly, most of the financial institutions in the region remained largely unscathed during the recent global financial crisis, mainly due to their strong liquidity and capital buffers. Yet, given the episodes of past crisis, the rapid increase in regional corporations and cross-border flows in the region, as well as the paramount importance of the banking sector in the Asian region, it is interesting to study how the banking sectors in the various economies co-move with each other. Against this backdrop, we examine the dependence structure between banking sectors in the region using copula functions. Several findings are documented. First, average dependence generally remain at moderate levels, though dependence between the banking sectors of the developed Asian markets are relatively higher than the emerging markets. Second, we find evidence of asymmetric dependence, suggesting that banking sector returns co-movement varies in bearish and bullish markets. Third, our results show a mild increase in the bivariate dynamic correlations during crisis periods, indicating very limited risk of contagion. Our results provide significant implications for portfolio managers and policymakers.     

金融危机跨国传染的实证检验——以美国金融危机为例

论文使用包括美国在内的28个经济体的股票指数的日收益率,进行相关系数及其费雪Z转换来检验美国金融危机的跨国传染效应;并运用单因素模型回归来验证纯传染效应的存在以及用经异方差调整后的相关系数对此纯传染效应进一步判断,分析结果表明:中国大陆和香港地区在本次危机中不仅存在金融危机传染效应,而且存在金融危机纯传染效应,而另外8个存在金融危机传染效应的经济体则不存在纯传染效应。     

Cyclical correlations, credit contagion, and portfolio losses

We model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes. Cyclical correlation is due to the dependence of firms on common economic factors. Contagion is associated with the local interaction of firms with their business partners. We provide an explicit normal approximation of the distribution of portfolio losses. We quantify the relation between the variability of global economic fundamentals, strength of local firm interaction, and the fluctuation of losses. We find that cyclical oscillations in fundamentals dominate average losses, while local interaction causes additional fluctuations of losses around their average. The strength of the contagion-induced loss variability depends on the complexity of the business partner network.     

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.     

Financial contagion effects of major crises in African stock markets

This study examines financial contagion effects in African stock markets during major crises over the period 2005 to 2020. We investigate contagion effects in individual stock markets and from a regional perspective using dynamic conditional correlations during the global financial crisis, European debt crisis, Brexit, and COVID-19. The empirical evidence confirms contagion effects in some individual markets. However, significant evidence of contagion is found only during the global financial crisis from the regional perspective. Our findings suggest that the regional impacts of crises differ due to the nature of those crises. We also find financial contagion increases in the country-level risk, market capitalization and export to GDP and decreases in corruption.     

The impact of the 2008 and 2010 financial crises on the Hurst exponents of international stock markets: Implications for efficiency and contagion

This study analyzes how the 2008 and 2010 financial crises, which began in the US and Greece respectively, affected the Hurst exponents of index returns of the stock markets of Belgium, France, Greece, Japan, the Netherlands, Portugal, the UK and US. We perform two innovative statistical tests for this purpose. The first assesses whether the returns exhibit a long memory in the pre-crisis and crisis periods and determines the extent to which the Hurst exponents, calculated with the multifractal detrended moving average technique (MFDMA), differ from the tranquil to the crisis periods. The second test uses copula models to assess whether the correlation between the local Hurst exponents of the markets where the crises originated and those of the other markets increased due to the crises. The results of the first test suggest that although most of the returns exhibit a long memory in the 2008 crisis period, this is not the case in either the pre-crisis or the 2010 crisis periods. These findings shed light on the dynamics of market efficiency. The results of the second test show a significant increase in correlation between the local Hurst exponents of several markets, suggesting the existence of financial contagion. We observed that the 2008 crisis had a greater impact on the memory properties of stock returns than the 2010 financial crisis.     

Volatility Spillovers and Contagion During the Asian Crisis: Evidence from Six Southeast Asian Stock Markets

Using a multivariate generalized autoregressive conditional heteroskedasticity (GARCH-M) model, we investigate volatility spillovers in six Southeast Asian stock markets around the time of the 1997 Asian crisis. We focus on interactions with the U.S. market as a world financial market, and with the Japanese market as a regional financial market. We also use bivariate GARCH-M models to examine the behavior of individual markets and their interactions with other markets in the region. All models lend support to the idea of the "Asian contagion," which started in Thailand and rapidly spread to other markets.     

Are stock market crises contagious? The role of crisis definitions

Financial contagion studies generally examine whether co-movement between markets increases during a crisis. We use a flexible co-movement measure to examine how conclusions of such analyses depend on the sample chosen as the ‘crisis’. To this end, we analyse stock market co-movement during the 1997 Asian crisis and the 2007 global financial crisis for all possible source countries and for all possible time periods or extreme return quantiles. This way we account for the main crisis dating approaches adopted in the literature. Our results suggest there is no clear relationship between excess co-movement and commonly used crisis samples.     

Is there life in the old dogs yet? Making break-tests work on financial contagion

Many tests of financial contagion require a definition of the dates separating calm from crisis periods. We propose to use a battery of break search procedures for individual time series to objectively identify potential break dates in relationships between countries. Applied to the biggest European stock markets and combined with two well established tests for financial contagion, this approach results in break dates which correctly identify the timing of changes in cross-country transmission mechanisms. Application of break search procedures breathes new life into the established contagion tests, allowing for an objective, data-driven timing of crisis periods.     

The 2008 financial crisis: Stock market contagion and its determinants

In this paper, we investigate worldwide contagion and its determinants during the 2008 financial crisis. Utilizing an international sample of returns from 2003 to 2009, we consider both uni- and bi-directional contagion. After controlling for crisis-related volatility, we find strong evidence that cross-market linkages increase among many financial markets. In contrast to previous crises, contagion following the 2008 global financial crisis is not confined to emerging markets. The United States and other mature financial markets in the sample transmit and receive contagion. Country markets are less influenced by regions than they are by other country markets. We also construct variables that represent relative changes in economic variables before and during the crisis. We find that both economic fundamentals such as trade structure, interest rates, inflation rates, industrial production, and regional effects, and investors’ risk aversion contribute to international contagion.     

Global financial crisis, extreme interdependences, and contagion effects: The role of economic structure?

The paper examines the extent of the current global crisis and the contagion effects it induces by conducting an empirical investigation of the extreme financial interdependences of some selected emerging markets with the US. Several copula functions that provide the necessary flexibility to capture the dynamic patterns of fat tail as well as linear and nonlinear interdependences are used to model the degree of cross-market linkages. Using daily return data from Brazil, Russia, India, China (BRIC) and the US, our empirical results show strong evidence of time-varying dependence between each of the BRIC markets and the US markets, but the dependency is stronger for commodity-price dependent markets than for finished-product export-oriented markets. We also observe high levels of dependence persistence for all market pairs during both bullish and bearish markets.     

An asymmetric dynamic conditional correlation analysis of linkages of European financial institutions during the Greek sovereign debt crisis

This article employs the asymmetric dynamic conditional correlation (DCC) model to assess impacts of the recent sovereign debt crisis on the time-varying correlations of five European financial institutions holding large amounts of Greek sovereign bonds (National Bank of Greece, BNP Paribas, Dexia, Generali, and Commerzbank). Contrary to the results of preceding studies, we find significant increases in the correlations between several combinations of the financial institutions’ stock returns after the inception of the sovereign debt crisis, indicating contagion effects. Moreover, our findings show that the parameter of the standardized negative residuals is statistically significant in the case of DCC estimates between two specific institutions. This suggests that the conditional correlation of stock returns between the two institutions is more significantly influenced by negative shocks than by positive innovations to return.     

Financial crisis and a transmission mechanism of external shocks: The signaling role of the Korean Monetary Stabilization Bond

This paper explores a transmission mechanism of an exogenous shock to domestic financial markets by investigating the potential signaling role of the Monetary Stabilization Bond (MSB) spread together with several financial variables in Korea. The MSB spread widened and became more volatile during the crisis period after the variance change point at the end of 2007, when the causality relationships between the key variables became apparent. The empirical results illustrate that a foreign shock, which directly leads to rapid short-term capital flow and foreign exchange rate fluctuation, is likely to have a significant contagion effect on domestic financial markets in the case where it has a sizable negative impact on national foreign reserve holdings. The MSB is a monetary policy instrument for foreign exchange reserve management, and the daily observable MSB spread is a timelier signal in this transmission channel.     

宏观审慎政策协调能否抑制国际性银行危机传染？——基于跨境金融关联视角的实证研究

本文基于跨境金融关联视角对宏观审慎政策能否抑制国际性银行危机传染这一重要的理论与实践问题进行了实证研究。选取亚洲金融危机和全球金融危机时期遭受冲击的10个代表性国家作为样本,构建Logit模型和多元回归模型探讨本国及具有金融关联的国家协调实施宏观审慎政策对本国系统性银行危机传染的影响。研究表明,具有金融关联的国家出现金融危机会显著增加本国系统性银行危机的发生概率,具有金融关联的国家实施宏观审慎政策对本国信贷的影响比对房价的影响更明显,本国及具有金融关联的国家协调实施宏观审慎政策会显著降低本国系统性银行危机的发生概率。在调整银行危机指标及考虑贸易关联和流动性风险的影响后,研究结果依然保持稳健。本文的研究结论揭示了加强宏观审慎政策协调有助于维护全球金融稳定,对于中国政策当局强化宏观审慎管理具有极其重要的政策含义。     

Interconnected multilayer networks: Quantifying connectedness among global stock and foreign exchange markets

This paper proposes a novel interconnected multilayer network framework based on variance decomposition and block aggregation technique, which can be further served as a tool of linking and measuring cross-market and within-market contagion. We apply it to quantifying connectedness among global stock and foreign exchange (forex) markets, and demonstrate that measuring volatility spillovers of both stock and forex markets simultaneously could support a more comprehensive view for financial risk contagion. We find that (i) stock markets transmit the larger spillovers to forex markets, (ii) the French stock market is the largest risk transmitter in multilayer networks, while some Asian stock markets and most forex markets are net risk receivers, and (iii) interconnected multilayer networks could signal the financial instability during the global financial crisis and the COVID-19 crisis. Our work provides a new perspective and method for studying the cross-market risk contagion.