Transmission of the 2007–2008 financial crisis in advanced countries of the European Union

The aim of this paper is to identify the main factors responsible for the 2007–2008 crisis development and transmission across the 10 developed European Union (EU) countries. In order to achieve this objective, trade and financial linkages, crisis contagion from the United States and EU countries and countries' internal and external economic vulnerabilities are examined. The results of logistic regression model covering the period from 2002 to 2012 presented in this paper indicate that the transmission of the crisis occurred through contagion from the United States but also from other EU countries. Additionally, the empirical results confirm that high inflation, a decrease in the exchange rate, and a decrease in the US long-term interest rates increased the probability of the 2007–2008 financial crisis.     

Developing countries’ financial vulnerability to the eurozone crisis: an event study of equity and bond markets

The global crisis highlights the continued vulnerability of developing countries to shocks from advanced economies. Just a few years after the global crisis, the eurozone sovereign debt crisis has emerged as the single biggest threat to the global outlook. In this paper, we apply the event study methodology to gauge the scope for financial contagion from the EU to developing countries. More specifically, we estimate the responsiveness of equity and bond markets in developing countries to global crisis period and eurozone crisis news. Overall, we find that whereas global crisis period had a consistently negative effect on returns of equity and bond markets in developing countries, the effect of eurozone crisis news was more mixed and limited.     

Model uncertainty in Panel Vector Autoregressive models

We develop methods for Bayesian model averaging (BMA) or selection (BMS) in Panel Vector Autoregressions (PVARs). Our approach allows us to select between or average over all possible combinations of restricted PVARs where the restrictions involve interdependencies between and heterogeneities across cross-sectional units. The resulting BMA framework can find a parsimonious PVAR specification, thus dealing with overparameterization concerns. We use these methods in an application involving the euro area sovereign debt crisis and show that our methods perform better than alternatives. Our findings contradict a simple view of the sovereign debt crisis which divides the euro zone into groups of core and peripheral countries and worries about financial contagion within the latter group.     

Interdependence or contagion: A model switching approach with a focus on Latin America

Empirical research analysing contagion has become increasingly fragmented. Different definitions of contagion have resulted in different methods being deployed to analyse financial transmission channels. This paper devises a novel econometric strategy where the nature of interdependencies, magnitude of interdependencies and transmission channels selected for inclusion can change over time. We thus appeal to multiple definitions of contagion, distinguishing between: interdependence, contagion through interdependence and abrupt contagion through changing linkages. Using our approach we analyse different crisis episodes in Latin America. Results generally indicate interdependence not contagion during the currency crises of the 1990s and Argentine crisis of 1998–2002. During the global financial crisis, results indicate abrupt contagion from the US to Argentina and Brazil. Mexico, however, experiences contagion through existing interdependencies with the US. Results also show that macroeconomic and uncertainty channels play a role during different crises not just financial channels. By establishing whether or not different interdependencies and transmission channels are present during different crises our model switching approach provides new insights.     

Modeling,analysis and mitigation of contagion in financial systems

Recent financial turmoil (e.g., the 2008–2009 global financial crisis) has resulted in financial contagion-induced instability becoming one of the major concerns in the fields of economics and finance. In this paper, we extend the network analysis of financial contagion from three perspectives. First, given that cross-holding of claims and obligations among financial institutions can be viewed as input-output linkages, we model the financial system and the contagion mechanism by introducing the classic Leontief input–output framework. Second, based on this modeling process, we propose a simple contagion algorithm to study how financial system heterogeneity influences its stability. Third, to mitigate financial contagion, we propose several concrete intervention policies based on two widely used prudential approaches—forced mergers and capital injections. The performance of these intervention policies is then evaluated by comprehensive numerical experiments. Our study has significant implications for financial regulation and supervision.     

Explaining European Union Citizens’ Trust in the European Central Bank in Normal and Crisis Times

We study the determinants of trust in the European Central Bank (ECB) as measured by the European Commission's Eurobarometer survey, in particular during the global financial crisis and the European sovereign debt crisis. We find that the fall in trust in the ECB in crisis times can be rather well explained based on the pre‐crisis determinants. We also show that the fall in trust reflected the macroeconomic deterioration, a more generalized fall in the trust in European institutions in the wake of the crisis, and the severity of the banking sector's problems, to which the ECB was associated in the public opinion.     

Dynamic correlation and equicorrelation analysis of global financial turmoil: evidence from emerging East Asian stock markets

This study investigates the dynamic conditional correlations (DCCs) between eight emerging East Asian stock markets and the US stock market and analyses the dynamic equicorrelation among these nine stock markets. We find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis. We refer to this finding as contagion from the US stock market to the emerging East Asian markets. We also find an additional significant process of increasing correlations and equicorrelation (herding) in the second phase of the global financial crisis. Further, we employ two new models, namely DCCX-MGARCH (a DCC Multivariate GARCH model with exogenous variables) and DECOX-MGARCH (a dynamic equicorrelation multivariate GARCH model with exogenous variables), to identify the channels of contagion. We find that an increase in the VIX Index increases the conditional correlations and equicorrelation, while increases in TED spreads decrease the conditional correlations of six emerging East Asian countries with the USA. We compare the accuracy of the conditional correlation estimates of the DCC and DCCX models (or DECO and DECOX models) by constructing a loss function. We find that the DCCX (DECOX) model provides more accurate conditional correlation estimates than the DCC (DECO) model by extracting additional information from exogenous variables.     

Evaluating sovereign risk spillovers on domestic banks during the European debt crisis

Using a Markov-switching model with time-varying probabilities, spillovers from sovereign to domestic bank CDS spreads during the European debt crisis for a set of 14 European countries and 30 European banks are investigated. Our model is able to capture how the increased sovereign risk observed between 2010 and 2013 throughout Europe has impacted i) the probability that banks fall into a crisis regime and ii) the probability that banks stay in the crisis regime. The latter state is characterized by a high volatility and large positive returns of CDS spreads. Different regime-dependent indicators have been computed to assess heterogeneity within the region. The evidence indicates that the intensification of sovereign risk observed during the European debt crisis has positively and significantly driven the regime shifts in volatility of the bank CDS spreads due to increased risk aversion. The results show that the increase in sovereign credit risk seems to have generated second-round effects for some banks that have experienced a deterioration in their funding conditions due to a rise in the domestic sovereign default risk. Overall, our results suggest that sovereign CDS spreads can be considered good forewarning indicators for predicting the evolution of bank CDS spreads. We also find that the effects differ depending on the country and the financial institution. This result suggests that banks are heterogeneously exposed to sovereign credit risk within the same country. One argument relates to the size of these financial institutions and the domestic exposure to sovereign debt.     

European financial crisis and bank productivity: evidence from Eastern European Countries

The paper examines the productivity levels of the largest banks operating in the Eastern European countries over the period of the ongoing European financial crisis. Specifically, the analysis covers the periods of U.S. subprime crisis, the global financial crisis and the sovereign debt crisis. By adopting a fully nonparametric framework, it provides a probabilistic version of a directional input-oriented Malmquist productivity index alongside with its main decomposition. The results from the analysis suggest that banks have faced a deterioration of their productivity levels between the examined periods. It is evident that during the initiation of European sovereign debt crisis, the banks have weakened their ability to utilize efficiently their inputs of production and their ability to realize scale economies.     

中国货币政策对金融稳定 和主权债务风险的影响 *

本文研究在全球金融危机背景下,货币政策对中国主权债务风险和系统性金融风险的影响。实证研究发现,中国的系统性金融风险在样本期间内有两次大幅度的跃升。系统性金融风险的上升跟全球金融危机的传染机制有关,但本国货币政策的影响也不容忽视。这两个原因对中国的主权债务风险也有影响。扩张性货币政策冲击显著加大了中国系统性金融风险但降低了主权债务风险,而对实体经济影响有限。本文的发现支持中国人民银行在全球金融风险较高的情况下,采取更加审慎的货币政策。     

Causes and hazards of the euro area sovereign debt crisis: Pure and fundamentals-based contagion

This paper tries to contribute to the understanding of sovereign debt crises' pattern by empirically investigating the determinants of the recent euro area crisis to assess if its transmission was due to “pure” or “fundamentals-based” contagion. Using sovereign bond yield spreads with respect to Germany for a sample of ten central and peripheral countries from January 1999 to December 2012, we firstly examine the dynamic evolution of Granger-causality within the 90 pairs of yield spreads in our sample to detect episodes of contagion (associated with episodes of significant intensification in causality). Secondly, we make use of a logit model to explore whether there is evidence of “pure contagion” or “fundamentals-based contagion”, by trying to determine which factors might have been behind the detected contagion episodes. Our results suggest that contagion episodes are concentrated just after the inception of the EMU and matching the Global Financial Crisis, yielding more accurate and sensible indicators than those obtained from DCC-GARCH models used in prior studies. Indeed, they preceded the outburst of the Global Financial Crisis (causality intensification is detected from March 2008), and reached a peak during January–May 2011. Furthermore, they underline the coexistence of “pure” and “fundamentals-based contagion” during the recent European debt crisis.     

Measuring the systemic risk transfer from the United States to the South African financial sector

The sub-prime crisis in 2008 illustrated how systemic risk in the financial sector of one country could spread to the financial sectors in other countries, and subsequently result in a global financial crisis. This direct transfer of systemic risk was made possible by phenomena such as contagion and common shocks. The way in which these elements of interconnectedness can magnify seemingly small levels of systemic risk, and subsequently transfer between financial sectors illustrate the necessity for a more in-depth analysis. This measurement is done using three approaches. A dynamic conditional correlation (DCC) model is used to investigate contagion. To analyse the volatility spillover effect from the US to SA, an exponential generalized autoregressive conditional heteroskedastic (EGARCH) model is employed. Finally, a new contribution is made where a marginal expected shortfall (MES) model is used to set the FTSE/JSE All-Share Index (ALSI) as a hypothetical bank in the financial sector of the S&P 500. All approaches show weak evidence for a direct systemic risk transfer and therefore indicate that any systemic risk transfer is more likely to take an indirect form through changes in capital flows or interest rates.     

Investing against the wind: contagion during the recent financial crisis

This article examines the effect of Warren Buffett’s investment in Goldman Sachs on 24 September 2008, during the subprime mortgage crisis. Although this event is arguably perceived to be the biggest expression of confidence in the financial market during the crisis, by conducting event studies, we do not find the major counterparties of Goldman Sachs displayed positive abnormal returns. Moreover, the abnormal return is not significantly related to the counterparty connection. We have similar findings on these financial institutions’ default probabilities using credit default swap.     

Contagion of the Global Financial Crisis and the real economy: A regional analysis

This paper investigates the contagion effects of the Global Financial Crisis (2007–2009) by examining ten sectors in six developed and emerging regions during different phases of the crisis. The analysis tests different channels of financial contagion across regions and real economy sectors by utilizing dynamic conditional correlation from the multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) model. Evidence shows that the GFC can be characterized by contagion effects across regional stock markets and regional financial and non-financial sectors.However, Developed Pacific region and some sectors in particular Consumer Goods, Healthcare and Technology across all regions seem to be less affected by the crisis, while the most vulnerable sectors are observed in the emerging Asian and European regions. Further, the analysis on a crisis phase level indicates that the most severe contagion effects exist after the failure of Lehman Brothers limiting the effectiveness of portfolio diversification.     

国家主权信用评级、跨国传染与股票市场回应?--基于全球48个经济体的事件研究

掌握主权信用评级变动的市场影响及其传染机制,对于投资者、国家金融安全及政府采取应对措施来说都意义重大。文章采用事件研究法,以1990-2013年全球48个经济体发生的评级事件和每日股指收益率数据为样本,实证研究了事件国评级变动对非事件国股票市场的影响及其传染渠道,结果表明：(1)评级下调会对股票市场产生显著为负的超额收益,但评级上调产生的超额收益不显著;(2)股票市场可以提前预测评级下调事件,但不能预测评级上调事件;(3)季风效应对评级调整的市场传染有一定的解释力;(4)净传染效应基本不显著,这说明评级事件的市场传染应该有经济基础,而不是由投资者心理预期这类非基本面因素造成的;(5)溢出效应可以较好地解释评级的市场传染,是评级变动影响市场及传染的主要渠道。文章的结论深化了我们对评级调整如何影响股票市场及其传染渠道的认识,也为中国防范国外主权信用评级变动风险提供了有益启示。     

The static and dynamic connectedness of environmental,social, and governance investments: International evidence

We investigate the connectedness of the most significant global equity indices that comprise companies with the highest environmental, social, and governance (ESG) performance. Motivated by the rapid growth of socially responsible investing during the last two decades, we examine whether these investments are prone to similar exogenous economic and financial shocks as their conventional counterparts. Employing a variety of influential macroeconomic and financial variables over the period 10/1/2007–4/15/2020, we document statistically significant and consistent transmissions between the employed equity indices throughout the sample period. In particular, the connectedness exhibits dynamic patterns during three periods: the European sovereign debt crisis, the systemic Greek problems, and the outbreak of the coronavirus pandemic. We also find that developed equity markets are the shock transmitters to Asian and other emerging markets. Our results highlight the risk of contagion and the diminishing portfolio diversification benefits of these equity indices during turbulent periods.     

An Alternative Approach to the Institutional Economics of the Eurozone Crisis

I argue that the Eurozone crisis is neither a crisis of European sovereigns in the sense of governmental over-borrowing, nor a crisis of sovereign debt market over-lending. Rather, it is a function of the “sovereign debt market” institution itself. Crisis, I argue, is not an occurrence, but an element fulfilling a precise technical function within this institution. It ensures the possibility of designating — in the market’s day-to-day mechanisms rather than analytical hindsight — normal (tranquil, undisturbed) market functioning. To show this, I propose an alternative view on the institutional economics of sovereign debt markets. First, I engage literature on the emergent qualities of the institutions “market” and “firm” in product markets, concluding that the point of coalescence for markets is the approximation of an optimal observation of consumer tastes. I then examine the specific institution “financial markets,” where the optimal observation of economic fundamentals is decisive. For the specific sub-institution “sovereign debt market,” I conclude that the fundamentals in question — country fundamentals — oscillate between a status of observable fundamentals outside of markets and operationalized fundamentals influenced by market movements. This, in turn, allows me to argue that the specific case of the Eurozone crisis is due to neither of the two causes mentioned above. Rather, the notion of “crisis” takes on a technical sense within the market structure, guaranteeing the separation of herd behavior and isomorphic behavior on European sovereign debt markets. By the same token, the so-called Eurozone crisis ceases to be a crisis in the conventional sense.     

金融生态与银行危机传导

本文运用生态学原理与方法,从金融生态的基本特征入手,分析了银行危机传导机制,并提出了防范银行危机传导的对策措施。     

Contagion effects of sovereign credit rating revisions on the real economy: is it trade or finance?

We analyse the contagion effects of sovereign credit rating revisions on the real economy, with particular emphasis on the intensity of trade and finance channels. Our findings show that event countries that experienced rating revisions cause substantial contagion effects on the real output growth rates of nonevent countries. Nonevent countries with a high export ratio, high external debt levels, or those that are more dependent on common bank credit relative to other nonevent countries are more likely to be infected by event countries’ adverse credit shocks. The results remain after accounting for alternative real economy indicators, financial liberalization, financial crises, and economic development status.     

Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises

We study the hourly volatility spillover between the equity markets of New York (DJI), London (FTSE 100) and Tokyo (N225) and their exchange rates (USD, EUR, GBP and JPY) for the period of 2001 through 2013 covering the non-crises period, the global financial crisis and the euro debt crisis. First, we find a general increase in spillover between the equity and exchange rate markets during the crisis periods. Second, pure contagion (attributable to irrational investors’ behavior) and fundamental contagion (measured by macroeconomic fundamentals) explains the increased spillover between the FTSE 100, N225 to the DJI during the global financial crisis and from the exchange rate markets to the DJI during the euro debt crisis.