Modelling contagion of financial crises |
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| Affiliation: | 1. Division of Economics, Nanyang Technological University, Singapore 639805, Singapore;2. School of Economics and Commerce, South China University of Technology, China;3. Research Center of Financial Engineering, South China University of Technology, China;1. School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan, PR China;2. School of Economics and Management, Southwest Jiaotong University, Chengdu, Sichuan, PR China;1. Eastern Mediterranean University, Northern Cyprus, via Mersin 10, Turkey;2. Institute of Labor Economics (IZA), Bonn, Germany;3. Economic Research Forum (ERF), Cairo, Egypt;4. Gazi University, Ankara, Turkey;5. University of Nebraska-Omaha, USA;1. Department of Mathematical Sciences, Korea Advanced Institute of Science and Technology (KAIST), Daejeon 34141, Republic of Korea;2. School of Business Administration, Ulsan National Institute of Science and Technology (UNIST), Ulsan 44919, Republic of Korea;1. Department of Finance, California State University, Fullerton, United States;2. Institute of Finance, National Chiao Tung University, Taiwan;3. China University of Technology and National Chiao Tung University, Taiwan;1. School of Economics and Commerce, South China University of Technology, Guangzhou 510006, PR China;2. School of Management, Zhejiang University, Hangzhou 310058, PR China |
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| Abstract: | 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. |
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| Keywords: | Financial crash Contagion Heterogeneous agents |
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