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.     

Co-movement of Asia-Pacific with European and US stock market returns: A cross-time-frequency analysis

We investigate the co-movement of 13 Asia-Pacific stock market returns with that of European and US stock market returns using the wavelet coherence method. Our results show consistent co-movement between most of the Asia-Pacific stock markets and that of Europe and the US in the long run. We also uncover evidence of a wide variation in co-movement across the time scale of the financial crises. The co-movement dynamics of the Asia-Pacific markets with that of Europe and the US are different during the two financial crises. The difference in the co-movement dynamics could be the result of the different natures of the financial crises or a change in regime.     

Are European banks too big? Evidence on economies of scale

In light of the policy debate on too-big-to-fail we investigate evidence of economies of scale for 103 European listed banks over 2000–2011. Using the Stochastic Frontier Approach, the results show that economies of scale are widespread across different size classes of banks and are especially large for the biggest banks. At the country level, banks operating in the smallest financial systems and the countries most affected by the financial crises realize the lowest scale economies (including diseconomies) due to the reduction in production capacity. As for the determinants of scale economies, these mainly emanate from banks oriented toward investment banking, with higher liquidity, lower Tier 1 capital, those that contributed less to systemic risk during the crises, and those with too-big-to-fail status.     

Financial contagion and asset pricing

Asset market interconnectedness can give rise to significant contagion risks during periods of financial crises that extend beyond the risks associated with changes in volatilities and correlations. These channels include the transmission of shocks operating through changes in the higher order comoments of asset returns, including changes in coskewness arising from changes in the interaction between volatility and average returns across asset markets. These additional contagion channels have nontrivial implications for the pricing of options through changes in the payoff probability structure and more generally, in the management of financial risks. The effects of incorrectly pricing risk has proved to be significant during many financial crises, including the subprime crisis from mid 2007 to mid 2008, the Great Recession beginning 2008 and the European debt crisis from 2010. Using an exchange options model, the effects of changes in the comoments of asset returns across asset markets are investigated with special emphasis given to understanding the effects on hedging risk during financial crises. The results reveal that by not correctly pricing the risks arising from higher order moments during financial crises, there is significant mispricing of options, while hedged portfolios during noncrisis periods become exposed to price movements in times of crises.     

Internet search volumes of UK banks during the crisis: The role of banking structure and business model

This paper investigates the sensitivity of Google search volumes to the global financial crisis, using a large sample of UK banks. We find that abnormal volumes of searches on bank names are a timely indicator of credit risk, as measured by credit default swap rates, and are strongly related to crisis indicators. Search volumes for retail, private, and universal banks react more strongly than search volumes for other banks, suggesting that depositor concerns drive search volumes. Search volumes for internet banks and for European banks operating in the UK through branches are especially sensitive to crises.     

Transparency in the Financial System: Rollover Risk and Crises

We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank‐specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency during crises. Under this policy, however, information disclosure signals a deterioration of economic fundamentals, which gives the regulator ex post incentives to withhold information. This commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks, and can result in excess opacity that increases the likelihood of a systemic crisis.     

Do Sovereign Re‐Ratings Destabilize Equity Markets during Financial Crises? New Evidence from Higher Return Moments

This study investigates the effects of S&P's sovereign re‐ratings on the higher moments of equity market returns over recent financial crises. Using a set of intraday stock market index prices and sovereign credit ratings for a sample of 36 countries that experienced sovereign rating changes over the period from 1996 to 2013, we find that the higher moments of stock market returns are significantly more responsive to sovereign re‐ratings during financial crises, but the effects on stock markets are not the same across different financial crises. The effects during crises are, however, magnified for large downgrades and those that are associated with a loss of investment grade status. We find that there are asymmetric effects during financial crises in that downgrades are consistently more significant than upgrades in increasing realized volatility and realized kurtosis. Both upgrades and downgrades affect realized skewness in times of crises in the expected direction.     

Public bank lending in times of crisis

This paper studies the role of government-owned banks in the event of financial crises. The study takes an empirical perspective focusing on bank lending. We compare the lending responses across government-owned and private banks to financial crises using the balance sheet information of 764 major banks headquartered in 50 countries over the period of 1994–2009. Using a nested panel regression framework that allows for parameter shifts in the bank lending equation, we find robust evidence that government-owned banks increase their lending during crises relative to normal times, while private banks’ lending decreases. Government-owned banks thus counteract the lending slowdown of private banks. The findings suggest that governments can play an active counter-cyclical role in their banking systems directly through government-owned banks.     

以史为鉴——金融危机与世界经济格局变迁

全球金融危机余波尚未停息,欧债危机又风起云涌,发展之势愈演愈烈。本报告通过对上世纪以来所爆发的重大金融危机进行梳理和总结,着重分析历次金融危机爆发的原因、特征,并对金融危机爆所带来世界经济格局的变化进行阐述。     

Financial contagion: evolutionary optimization of a multinational agent-based model

Over the past two decades, financial market crises with similar features have occurred in different regions of the world. Unstable cross-market linkages during a crisis are referred to as financial contagion. We simulate crisis transmission in the context of a model of market participants adopting various strategies; this allows testing for financial contagion under alternative scenarios. Using a minority game approach, we develop an agent-based multinational model and investigate the reasons for contagion. Although the phenomenon has been extensively investigated in the financial literature, it has not been studied through computational intelligence techniques. Our simulations shed light on parameter values and characteristics which can be exploited to detect contagion at an earlier stage, hence recognizing financial crises with the potential to destabilize cross-market linkages. In the real world, such information would be extremely valuable in developing appropriate risk management strategies. Copyright © 2009 John Wiley & Sons, Ltd.     

Bank liquidity creation,monetary policy,and financial crises

This paper examines the interplay among bank liquidity creation (which incorporates all bank on- and off-balance sheet activities), monetary policy, and financial crises. We find that: (1) high liquidity creation (relative to trend) – particularly off-balance sheet liquidity creation – helps predict crises, controlling for other factors; (2) monetary policy has statistically significant, but economically minor effects on liquidity creation by small banks during normal times, and these effects are even weaker during financial crises; (3) monetary policy has very little effects on medium and large bank liquidity creation during both normal times and crises. These findings suggest that authorities may wish to monitor bank liquidity creation closely in order to predict and perhaps lessen the likelihood of financial crises. They might also consider other tools to control bank liquidity creation, such as capital and liquidity requirements.     

Unobservable shocks as carriers of contagion

We propose an identified structural GARCH model to disentangle the dynamics of financial market crises. We distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non-crisis markets, and the contagion imported to a tranquil domestic market from foreign crises. The model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses. To illustrate, we apply the method to data from the 1997–1998 Asian financial crisis which consists of a complicated set of interacting crises. We find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken. Impulse response functions for an equally-weighted equity portfolio show the increasing dominance of Korean and Hong Kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects.     

Joint effect of financial fragility and macroeconomic shocks on bank loan losses: Evidence from Europe

A reduced-form model including nonlinearities is estimated from pooled data from nine European countries during 1982–2004 to show the effects of macroeconomic shocks and financial fragility on bank loan losses. The main ingredients of the model are unanticipated-output and interest-rate shocks estimated from published macroeconomic and naïve forecasts. The model fits the data well, capturing the extremely high levels of loan losses witnessed in different financial crises.     

US macroeconomic news effects around the US and European financial crises: Evidence from Brazilian and Mexican equity indices

We examine the intraday index return and volatility responses of two Latin American equity markets to US macroeconomic news releases around the periods of the US and European financial crises. We find that while index return is more sensitive than volatility to macroeconomic news in general, the five-minute Brazilian and Mexican index volatilities respond especially strongly to US news surprises, with the Brazilian response being more pronounced, especially during the expansion period. Among the macroeconomic indicators tested, FOMC rate decisions exhibit the highest impact on volatility, and there is evidence of asymmetric response to positive versus negative news.     

The transmission of emerging market shocks to global equity markets

The paper analyzes whether, and to what extent, emerging market economies (EMEs) have systemic importance for global financial markets, above and beyond their influence during crises episodes. Using a novel database of exogenous economic and political shocks for 14 systematically relevant EMEs, we find that EME shocks not only have a statistically but also economically significant impact on global equity markets. The economic significance of EME shocks is in particular underlined by their remarkably persistent effects over time. Importantly, EMEs are found to influence global equity markets about just as much in “good” times as in “bad” times, though they tend to be stronger during crises or periods of financial turbulence. Finally, we detect a large degree of heterogeneity in the transmission of EME shocks to individual countries' equity markets, stressing the different degrees of financial exposure, which is relatively higher for European equity markets.     

Spillover among financial,industrial and consumer uncertainties. The case of EU member states

We examine connectedness among three types of uncertainties, financial, consumer and industrial uncertainties, in EU member states. The monthly series span the period January 2005 to March 2018, which includes the global financial crisis and the European sovereign debt crisis. The time and frequency spillover approaches based on generalized forecast error variance decomposition are used. We propose decomposing the connectedness tables into symmetric and skew-symmetric parts, for a better and more comprehensive interpretation. The results show that spillover among uncertainties is higher during crises. More spillover is observed within a specific type of uncertainty. The pairs of countries that transmit uncertainty to one another are geographically related, i.e. neighbouring countries. Financial uncertainty is a net transmitter to both industrial and consumer uncertainties.     

Unveiling investor-induced channels of financial contagion in the 2008 financial crisis using copulas

Understanding how financial crises spread is important for policy-makers and regulators in order to take adequate measures to prevent or contain the spread of these crises. This paper will test whether there was contagion of the subprime financial crisis to the European stock markets of the NYSE Euronext group (Belgium, France, the Netherlands and Portugal) and, if evidence of contagion is found, it will determine the investor-induced channels through which the crisis propagated. We will use copula models for this purpose. After assessing whether there is evidence of financial contagion in the stock markets, we will examine whether the ‘wealth constraints’ transmission mechanism prevails over the ‘portfolio rebalancing’ channel. An additional test looks at the interaction between stock and bond markets during the crisis and allows us to determine if the transmission occurred due to the ‘cross market rebalancing’ channel or the ‘flying to quality’ phenomenon. The tests suggest that (i) financial contagion is present in all analyzed stock markets, (ii) a ‘portfolio rebalancing’ channel is the most important crisis transmission mechanism, (iii) and the ‘flight-to-quality’ phenomenon is also present in all analyzed stock markets.     

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.     

Transparency,Value Creation,and Financial Crises

This article reports the findings of the authors' recent study of the impact of the level of corporate transparency on shareholder value creation during periods of financial crisis. Their sample consists of the companies comprising Spain's IBEX 35 stock index during the ten‐year period 2000–2010. The study uses three different measures of earnings management (EM) as inverse indicators of the quality of disclosure and carries out fixed effects regressions that adjust for firm and industry characteristics, two periods of financial crises, and the passage of time. The main findings of the study are that (1) companies with lower disclosure quality have generated less value for their shareholders over long time periods and that (2) the shareholders of companies that were more aggressive in managing their earnings experienced greater wealth destruction during the two financial crises of the last decade. Given the still unfolding impact of the recent global financial crisis, as reflected in the current debt crisis in Western European countries, the authors' study reinforces the importance of the current debate over the benefits and costs of increasing the regulation of financial markets, especially in the areas of transparency and disclosure requirements.     

International financial spillovers to emerging market economies: How important are economic fundamentals?

We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs), covering the so-called taper-tantrum episode of 2013 and seven other episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in relatively early and persisted through this episode. (3) During the taper tantrum, while controlling for the EMEs’ economic fundamentals, financial conditions also deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) During the EME crises of the 1990s and early 2000s, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities. (5) However, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode; it also occurred during the global financial crisis of 2008 and, subsequently, during financial stress episodes related to the European sovereign crisis in 2011 and China’s financial market stresses in 2015.