Nonlinear interdependence of the Chinese stock markets

The methodologies and assumptions in financial integration studies are problematic and may lead to spurious empirical results. Using surrogate data analysis and the mutual prediction method of testing for nonlinear interdependence, it is feasible for an analyst, with a scant knowledge of the underlying dynamics of two dynamical systems, to show whether or not the systems are interdependent. This study applies these techniques in testing for nonlinear interdependence of three Chinese stock markets: Shanghai, Shenzhen, and Hong Kong. The empirical results of the present study indicate that the stock market series are nonlinear and that the Chinese stock exchanges are nonlinearly interdependent. Specifically, the evidence indicates that Shanghai and Shenzhen markets are bi-directionally interdependent, while Shanghai and Hong Kong as well as Shenzhen and Hong Kong markets are unidirectionally interdependent, with the direction of interdependence going from the mainland's markets to the Hong Kong market.     

Contagion in international bond markets during the Russian and the LTCM crises

The Russian bond default in August 1998 and the long-term capital management (LTCM) recapitalization announcement in the following month represent an unusual period of volatility in international bond markets with bond spreads increasing dramatically across the globe. Using a latent factor model and a new data set spanning bond markets across Asia, Europe and the Americas, we quantify the contribution of contagion to the spread of these two crises. The maximum amount of contagion experienced by any of the countries investigated is about 17% of total volatility in bond spreads, with the main effects due to the Russian crisis. The results also show that both emerging and developed markets experienced contagion during the period.     

Explaining co-movements between stock markets: The case of US and Germany

We explain co-movements between stock markets by explicitly considering the distinction between interdependence and contagion. We propose and implement a full-information approach on data for US and Germany to provide answers to the following questions:

(i) Is there long-term interdependence between US and German stock markets?

(ii) Is there short-term interdependence and contagion between US and German stock markets, i.e. do short-term fluctuations of the US share prices spill over to German share prices and is such co-movement unstable over high-volatility episodes?

Our answers are, respectively, no to the first question and yes to the second one.     

Foreign Exchange Market Contagion in the Asian Crisis: A Regression-Based Approach

This paper investigates whether, during the Asian crisis, contagion occurred from Thailand to the other crisis countries through the foreign exchange market, and, if so, determines the contribution of this contagion to the crisis. More specifically, we examine whether the effect of the exchange market pressure (EMP) of Thailand, the origin of the crisis, on the EMP of four Asian crisis countries increased during the crisis. Instead of measuring contagion by the commonly used correlation coefficients, we apply regression analysis. To control for the impact of macroeconomic fundamentals, we construct a time-varying indicator measuring the fragility of each economy. Additionally, we control for spillovers and common external shocks. We find evidence of contagion from Thailand to Indonesia and Malaysia, with 13 and 21 percent of the pressure on the respective currencies attributable to that contagion. For Korea and the Philippines there is no evidence of contagion from Thailand. JEL no. F30, F31, G15     

Contagion effects of national innovative capacity: Comparing structural equivalence and cohesion models

The effective promotion of national innovation performance is a crucial component of national innovation policy. This study examines network contagion effects of national innovative capacity via the international diffusion of embodied and disembodied technology by two different social network models: the cohesion model, based on diffusion by direct communication, and the structural equivalence model, based on diffusion by network position similarity. This investigation then utilizes data of 42 countries during 1997 to 2002 to empirically examine their network relationship. The analytical results demonstrate that international technology diffusion influences national innovation performance through contagion effects, but that the international similarity of national innovative capacity performance is more accurately predicted by network position than by interactions with others; and this study result provides a new perspective for science and technology policy makers.     

On the measurement of the international propagation of shocks: is the transmission stable?

The empirical literature on ‘contagion’ focuses mainly on two questions: (1) what are the channels through which shocks are transmitted across countries, trade, macro similarities, financial weaknesses, or investor behavior? (2) Is there a shift in the transmission of shocks during crises? Are crises spread with higher intensity? If so, why? This paper concentrates on the econometric problems that arise in dealing with the second question. The data where most of these issues are raised are plagued with problems of simultaneous equations, omitted variables, and heteroskedasticity. The standard methodologies used in the literature are inappropriate if all three are present. This paper applies a new procedure that allows one to test for parameter stability, taking into account all three predicaments. The paper tests for the stability of the transmission mechanisms among 36 stock markets during the last three major international financial crises (Mexico 1994, Asia 1997, and Russia 1998).     

Coordination of speculation

We extend the models of Krugman [Journal of Money, Credit and Banking, 11 (1979) 311] and Flood and Garber [Journal of International Economics, 17 (1984) 1] on balance of payments crises to a multi-country setting such that coordination among speculators is important for a focal point to emerge. The moment of successful coordination when the currency is devalued is shown to depend on initial beliefs, the degree of imperfect communication, the rate of domestic credit creation, and the number of countries that have overvalued currencies. Contagion arises naturally in our framework. Subsequent speculative attacks occur faster and faster and communication among speculators results in fluctuating stocks of reserves prior to the attack.     

Contagion and interdependence in stock markets: Have they been misdiagnosed?

We discuss different methods proposed in the literature to analyse the propagation mechanism of a crisis and to verify the presence of contagion. We consider the propagation mechanisms of the Hong Kong index on the Eurostoxx, Nikkei and Dow Jones indexes during the Asian financial crisis. We show that the methodologies proposed by Forbes and Rigobon [J. Finance 57 (2002) 2223] and by Corsetti et al. [Some contagion, some interdependence more pitfalls in tests of financial contagion, CEPR Discussion Paper No. 3310, London, 2002] are highly affected by the windows used and by the presence of omitted variables: we propose some analyses to strengthen the robustness of these tests. Concerning the DCC test, we show that it is unable to cope with some kinds of heteroskedasticity.     

Modelling contagion of financial crises

Inspired by the empirical findings, we include international traders to capture linkage between markets and propose a two-market heterogeneous agents model to simulate financial crisis with contagion effect. This paper manages to calibrate sudden crash behavior of US and UK stock markets during “Black Monday” of 1987 besides smooth crisis and disturbing crisis categorized in literature. It is implied that financial crisis and its contagion could be endogenous, which supports a scenario of over-valuation causing a financial crisis. In addition, the model shows that financial system could be fragile in which small shock(s) hitting individual market’s fundamental could cause financial crisis spreading to the other market. This also supports a scenario of external shock triggering a financial crisis. Lastly, to demonstrate the relevance of our model to financial markets, we manage to match typical stylized facts, especially cross-correlation which is exclusive to a multiple-market case.     

法律保护、信息环境与信息传染效应：来自乳业危机的证据

以三鹿事件所引发的乳业危机为背景,本文考察了我国资本市场中的信息传染效应在不同公司间横截面上差异的原因。研究发现,宏观层面的法律保护和微观层面的公司信息环境都与毒奶粉事件的信息传染效应显著负相关。进一步的研究还表明,宏观层面的法律保护和微观层面的公司信息环境对信息传染效应的影响存在着互补关系。这意味着,要提高我国资本市场的资源配置效率,就必须同时改善宏观层面的投资者法律保护制度和微观层面的公司信息环境。