contagion macroeconomic models with multiple equilibria abstract several concepts of contagion are distinguished it is argued that models that allow only a single equilibrium conditional on the macroeconomic fundamentals are not adequate to capture all forms of contagion hence it is useful to formulate macro models that admit multiple equilibria and self fulfilling expectations a simple balance of payments model is presented to illustrate that phenomenon and some back of the envelope calculations assess its relevance to the coincidence of emerging market crises in 1994 95 and in 1997

dynamic linkages among equity markets local versus basket currencies this article compares the stability of interrelationships among nine national equity markets by employing basket currencies versus individual base currencies to measure rates of return we show that the average correlations of equity indexes based on basket currencies are much lower than the average correlations of equity indexes based on individual home base currencies additionally empirical directed graph results from using basket currencies are more consistent with each other than the results from using different individual currencies we conclude that basket currencies provide more robust results for studying equity market comovements than individual currencies by implication studies on equity market interrelationships including studies on potential financial contagion between equity markets should use basket currencies to avoid currency dependent results

contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

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

transmission of the financial and sovereign debt crises to the emu stock prices cds spreads and exchange rates abstract this paper tests for the transmission of the 2007 2010 financial and sovereign debt crises to fifteen emu countries we use daily data from 2003 to 2010 on country financial and non financial stock market indexes to analyze the stock market returns for three country groups within emu north south and small the following results hold for both the north and south european countries while the smallest countries seem to be relatively isolated from international events first we find strong evidence of crisis transmission to european non financials from us non financials but not for financials second in order to test how the sovereign debt crisis affects stock market developments we split the crisis in pre and post lehman sub periods results show that financials become significantly more dependent on changes in the difference between the greek and german cds spreads after lehman s collapse compared to the pre lehman sub period however this increase is much smaller for non financials third before the crisis euro appreciations coincide with european stock market decreases whereas this relationship reverses during the crisis finally this reversal seems to be triggered by lehman s collapse

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

optimal currency composition for china s foreign reserves a copula approach this paper investigates the optimal currency composition for a country s foreign reserves in the context of china we examine the asymmetric fat tail and complex dependence structure in distributions of currency returns a skewed fat tailed and pair copula construction is then built to capture features of higher moments in a d vine copula approach we show that under the disappointment aversion effect the central bank in our model can achieve sizeable gains in expected economic value from switching from the mean variance to copula modelling we find that this approach will lead to an optimal currency composition that allows china to have more space for international currency diversification while maintaining the leading position of the us dollar in the currency shares of china s reserves

international asset pricing and portfolio diversification with time varying risk we test the conditional capital asset pricing model capm for the world s eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity garch parameterization our methodology can be applied simultaneously to many assets and at the same time accommodate general dynamics of the conditional moments the evidence supports most of the pricing restrictions of the model but some of the variation in risk adjusted excess returns remains predictable during periods of high interest rates our estimates indicate that although severe market declines are contagious the expected gains from international diversification for a u s investor average 2 11 percent per year and have not significantly declined over the last two decades

the asymptotic distribution of extreme stock market returns this article presents a study of extreme stock market price movements according to extreme value theory the form of the distribution of extreme returns is precisely known and independent of the process generating returns using data for an index of the most traded stocks on the new york stock exchange for the period 1885 1990 the author shows empirically that the extreme returns obey a frechet distribution copyright 1996 by university of chicago press

measuring the subprime crisis contagion evidence of change point analysis of copula functions in this paper we first determine the existence of structural changes in the dependence between time series of equity index returns of two markets using the change point testing method the method is based on archimedean copula functions which are able to comprehensively describe dependence characteristics of random variables the degree of financial contagion between markets is subsequently estimated using the tail dependence coefficient of copula functions before and after the change point we empirically test our method by investigating financial contagion during the subprime crisis between the us s p 500 index and five asian markets namely china japan korea hong kong and taiwan our results show that a statistically significant change point exists in the dependence between the us market and all asian stock markets except taiwan the upper tail dependence is larger after the time of change implying the existence of contagion during the banking crisis between the us and the asian economies the degree of financial contagion is also estimated and found to be consistent with market events and media reports during that period

measuring contagion between energy market and stock market during financial crisis a copula approach abstract in this paper we apply time varying copulas to investigate whether a contagion effect existed between energy and stock markets during the recent financial crisis using the wti oil spot price the s p500 index the shanghai stock market composite index and the shenzhen stock market component index returns evidence was found for a significantly increasing dependence between crude oil and stock markets after the failure of lehman brothers thus supporting the existence of contagion in the sense of forbes and rigobon s 2002 definition moreover increased tail dependence and symmetry characterize all the paired markets this indicates that significant increases in tail dependence are an actual dimension of the contagion phenomenon and that crude oil and stock prices are linked to the same degree regardless of whether markets are booming or crashing during the sample period finally the contagion effect is found to be much weaker for china than the us the empirical results have potentially important implications for risk management

contagion and banking crisis international evidence for 2007 2009 abstract policy makers aim to avoid banking crises and although they can to some extent control domestic conditions internationally transmitted crises are difficult to tackle this paper identifies international contagion in banking during the 2007 2009 crisis for 54 economies we identify three channels of contagion systematic idiosyncratic and volatility and find evidence for these in 45 countries banking crises are overwhelmingly associated with the presence of both systematic and idiosyncratic contagion the results reveal that crisis shocks transmitted from a foreign jurisdiction via idiosyncratic contagion increase the likelihood of a systemic crisis in the domestic banking system by almost 37 percent whereas increased exposure via systematic contagion does not necessarily destabilize the domestic banking system thus while policy makers and regulatory authorities are rightly concerned with the systematic transmission of banking crises reducing the potential for idiosyncratic contagion can importantly reduce the consequences for the domestic economy

capturing downside risk in financial markets the case of the asian crisis abstract using data on asian equity markets we observe that during periods of financial turmoil deviations from the mean variance framework become more severe resulting in periods with additional downside risk to investors current risk management techniques failing to take this additional downside risk into account will underestimate the true value at risk with greater severity during periods of financial turnoil we provide a conditional approach to the value at risk methodology known as conditional var x which to capture the time variation of non normalities allows for additional tail fatness in the distribution of expected returns these conditional var x estimates are then compared to those based on the riskmetrics methodology from j p morgan where we find that the model provides improved forecasts of the value at risk we are therefore able to show that our conditional var x estimates are better able to capture the nature of downside risk particularly crucial in times of financial crises

the structure and degree of dependence a quantile regression approach abstract the copula function defines the degree of dependence and the structure of dependence this paper proposes an alternative framework to decompose the dependence using quantile regression we demonstrate that the methodology provides a detailed picture of dependence including asymmetric and non linear relationships in addition changes in the degree or structure of dependence can be modeled and tested for each quantile of the distribution the empirical part applies the framework to three different sets of financial time series and demonstrates substantial differences in dependence patterns among asset classes and through time the analysis of 54 global equity markets shows that detailed information about the structure of dependence is crucial to adequately assess the benefits of diversification in normal times and crisis times

econometric issues in the analysis of contagion this paper presents a canonical econometric model of contagion and investigates the conditions under which contagion can be distinguished from inter dependence in a two country market set up it is shown that for a range of fundamentals the solution is not unique and for sufficiently large values of the contagion coefficients it has interesting bifurcation properties with bimodal density functions the extension of the model to herding behaviour is also briefly discussed to identify contagion effects in the presence of inter dependencies the equations for the individual markets or countries must contain country market specific forcing variables this sheds doubt on the general validity of the correlation based tests of contagions recently proposed in the literature which do not involve any country market specific fundamentals finally we show that ignoring inter dependence can introduce an upward bias in the estimate of the contagion coefficient and using monte carlo experiments we further show that this bias could be substantial

crisis transmission evidence from the debt tequila and asian flu crises the increasing globalization of the economy has put the issue of the international transmission of crises in the front line although the word contagion is a rather new concept in international finance it is the focus of a large number of policy oriented seminars and debates the clustering of crises by both region and time are at the heart of this discussion there are several important questions that need to be answered in this chapter we focus on a subset of them i what are the propagation channels of international crises across countries other than common shocks ii was the debt crisis contagious and iii are there useful policy instruments to shield countries from contagion in particular do capital controls exchange rate flexibility and the external debt maturity structure affect contagion we seek to answer these questions using evidence from three key events the 1982 debt crisis the 1994 mexican devaluation and the 1997 asian crisis

news spillovers from the greek debt crisis impact on the eurozone financial sector abstract we examine the impact of changes in greek sovereign yield spreads on abnormal returns of financial sector stocks for a sample of eurozone countries during the greek debt crisis we find that increases in yield spreads are associated with negative abnormal returns on financial stocks in the portugal spain and netherlands these abnormal returns are driven in part by ratings downgrades and other unfavorable news announcements about greece we isolate the effects of known transmission channels impairment of financial firms asset base due to cross holdings of greek bonds from increases in domestic interest rates and higher funding costs our analysis indicates that news events lead to spillovers in excess of what can be explained by these channels of transmission

a new approach to measuring financial contagion this article proposes a new approach to evaluate contagion in financial markets our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions we characterize the extent of contagion its economic significance and its determinants using a multinomial logistic regression model applying our approach to daily returns of emerging markets during the 1990s we find that contagion is predictable and depends on regional interest rates exchange rate changes and conditional stock return volatility evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed

euro area government bonds fragmentation and contagion during the sovereign debt crisis abstract the paper analyzes the integration of euro area sovereign bond markets during the european sovereign debt crisis it tests for contagion i e an intensification in the transmission of shocks across countries fragmentation a reduction in spillovers and flight to quality patterns exploiting the heteroskedasticity of intraday changes in bond yields for identification the paper finds that euro area government bond markets were well integrated prior to the crisis but saw a substantial fragmentation from 2010 onward flight to quality was present at the height of the crisis but has largely dissipated after the european central bank s ecb s announcement of its outright monetary transactions omt program in 2012 at the same time italy and spain became more interdependent after the omt announcement providing our only evidence of contagion this suggests that countries have been effectively ring fenced and italy and spain benefited from the joint reduction in yields following the omt announcement

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

unravelling financial market linkages during crises an empirical model of multiple asset classes across countries is formulated in a latent factor framework a special feature of the model is that financial market linkages during periods of financial crises including spillover and contagion effects are formally specified the model also captures a range of common factors including global shocks country and market shocks and idiosyncratic shocks the framework is applied to modelling linkages between currency and equity markets during the east asian financial crisis of 1997 98 the results provide strong evidence that cross market links are important spillovers have a relatively larger effect on volatility than contagion but both are statistically significant

contagion risk in the australian banking and property sectors abstract the australian banking system emerged from the global crisis virtually unhurt with most banks still profitable adequately capitalized and with aa credit ratings are there any risks or vulnerabilities in this success story this paper analyzes australia s systemic banking risk and attempts to determine if this risk increased with the recent global crisis and whether this risk is related to the downturn experienced in the real estate market we use extreme value theory to measure banks and property firms univariate value at risk as well as multivariate intra sector and inter sector contagion risks of the 13 sectors analyzed we find that the property sector exhibits the highest level of extremal dependence with the banking sector the credit crisis significantly increased the probability of a bank or property firm crashing moreover contagion risks significantly increased not only within the banking and property sectors but also between those sectors

tail events a new approach to understanding extreme energy commodity prices abstract this paper shows that extreme energy price changes located in the 10 tails of the distribution cluster across energy futures markets during the boom bust cycle of 2006 to 2012 using multinominal logit regressions we find that the coincidence of such tail events cannot be explained solely by common supply and demand fundamentals instead we provide evidence that the transmission of extreme price changes occurs through a financial demand channel specifically changes in the net long position of hedge funds are associated with a significant increase in the probability of coincident large positive and negative returns across energy markets evidence that index investments drive tail events is limited further we identify adverse shocks to speculator funding liquidity as determinant of synchronized price drops across energy markets the likelihood of extreme negative returns in more than one market significantly increases when the ted spread rises

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the reality of stock market jumps diversification abstract we propose a non parametric procedure for estimating systemic co jumps and independent idiosyncratic jumps for 35 stock markets and study news associated with these jumps as reported in factiva and bloomberg from 1988 to 2014 our results suggest that it is important to distinguish between systemic co jumps and idiosyncratic jumps we find both types of jumps have important implications for home bias investors while idiosyncratic jumps have economically significant impact on portfolio weights for emerging markets our news analysis suggests systemic jumps are typically caused by currency crises sectoral failure liquidity issues and deteriorating economic climate while idiosyncratic jumps are usually caused by political unrest currency instability and large firm effects on small economies in fact many of the idiosyncratic jumps share the same origin although different stock markets experienced the impact differently at different times

the crash risks of style investing can they be internationally diversified the crash risks of momentum tend to be higher than those of size and value international diversification lowers the crash risks of size and value but not momentum the authors examined the conditional correlations and return co exceedances of style portfolios across countries and found that this difference in the effect of diversification is due to the left right tails of momentum size and value portfolios being more correlated than the right left tails across countries

measuring sovereign risk spillovers and assessing the role of transmission channels a spatial econometrics approach abstract we contribute to the literature on international risk spillovers by developing a unified framework based on spatial econometrics that enables us to address the following questions i what are the effective transmission channels real linkages and informational channels of international risk spillovers across countries and or regions ii what are the most dominant ones and iii which countries are most at risk for their environment and which are suffering the most from international exposure our analysis based on 41 advanced and emerging economies from 2008q1 to 2012q4 shows that among the considered channels for explaining international spillovers of sovereign bond spreads the informational channel is of utmost importance our results challenge previous findings from the literature in which the empirical strategy did not accommodate altogether important features of country spillovers such as the co existence of multiple transmission channels in the presence of contemporaneous and time lagged interactions ultimately our stress testing analysis reveals important insights on countries prone either to international spillovers international exposure or both at the regional and the worldwide level

tail risk and systemic risk of us and eurozone financial institutions in the wake of the global financial crisis we evaluate multiple market based measures for us and eurozone individual bank tail risk and bank systemic risk we apply statistical extreme value analysis to the tails of bank equity capital losses to estimate the likelihood of individual institutions financial distress as well as individual banks exposure to each other spillover risk and to global shocks extreme systematic risk the estimation procedure presupposes that bank equity returns are heavy tailed and tail dependent as identifying assumption using both us and eurozone banks allows one to make a cross atlantic comparison of tail risks and systemic stability we also assess to what extent magnitudes of tail risk and systemic risk have been altered by the global financial crisis the results suggest that both tail risk and systemic risk in the us are higher than in the eurozone regardless of the considered sample period

dependence and extreme dependence of crude oil and natural gas prices with applications to risk management abstract in this article we show how the copula garch approach can be appropriately used to investigate the conditional dependence structure between the crude oil and natural gas markets as well as to derive implications for portfolio risk management in extreme economic conditions using daily price data from january 1997 to october 2011 our in sample results show evidence of asymmetric dependence between the two markets the crude oil and gas markets tend to comove closely together during bullish periods but not at all during bearish periods moreover taking the extreme comovement into account leads to an improvement in the accuracy of the out of sample value at risk forecasts

modeling extreme dependence between european electricity markets electricity spot prices are characterized by sudden large movements followed a few days later by an equally large movement in the opposite direction these phenomena are called spikes upward movements and drops downward movements recent research has suggested that the dynamics of the electricity spot prices can be accurately described by hidden markov regime switching mrs models regime switch models separate the ordinary dependence and the extreme spike or drop dependence this is a crucial point since it is the extreme dependence that is of interest when computing risks we fit a large number of mrs models to six european electricity markets eex powernext apx power uk nl nord pool system sweden in order to analyze the nature of the prices the estimated regimes are then used to analyze the probability of an extreme event and the conditional probability for one market to experience an extreme event conditional that another market is experiencing the same event we find that the frequency of extreme events is positively related to the amount of renewable energy sources in the power system it can be argued that the dependence results in this paper give an indication of what future dependence for even more integrated markets with more renewable energy will be the integration of markets will lead to efficient sharing of reserves while the additional renewable energy will increase the need for reserves the results are of interest when computing financial risks e g var or expected shortfall when designing reserves but also as an indication of the degree of integration between markets

modeling financial contagion using mutually exciting jump processes we propose a model to capture the dynamics of asset returns with periods of crises that are characterized by contagion in the model a jump in one region of the world increases the intensity of jumps both in the same region self excitation as well as in other regions cross excitation generating episodes of highly clustered jumps across world markets that mimic the observed features of the data we develop and implement moment based estimation and testing procedures for this model the estimates provide evidence of self excitation both in the us and the other world markets and of asymmetric cross excitation with the us market typically having more influence on the jump intensity of other markets than the reverse we propose filtered values of the jump intensities as a measure of market stress and examine their out of sample forecasting abilities

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

economic determinants of comovement across international stock markets the example of taiwan and its key trading partners this study uses the multinomial logit model in which comovements are categorized into three outcomes namely i negative comovements ii positive comovements and iii no comovements with the purpose of the empirical analysis being to investigate the economic determinants that affect the comovement relationships in the stock markets for taiwan and four major trading partners mainland china united states japan and hong kong using daily data covering the period from 1994 to 2004 the period under study is further divided into three sub periods i e the period before the asian financial crisis that during the asian financial crisis and that after the asian financial crisis in order to determine whether the factors influencing the comovements in the stock market returns of taiwan and its trading partners actually change over time in addition this study differs from earlier studies that only emphasized the analysis of statistical significance in that it attaches importanace to analysing both the s

contagion as a domino effect in global stock markets this paper shows that stock market contagion occurs as a domino effect where confined local crashes evolve into more widespread crashes using a novel framework based on ordered logit regressions we model the occurrence of local regional and global crashes as a function of their past occurrences and financial variables we find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes besides this form of contagion interdependence shows up by the effect of interest rates bond returns and stock market volatility on crash probabilities when it comes to forecasting global crashes our model outperforms a binomial model for global crashes only

dynamic hedging and extreme asset co movements the paper investigates the portfolio allocation effects of increased asset co movements during market downturns we develop a model for the stock price process that allows for increased and asymmetric dependence between extreme return realizations we isolate the portfolio hedging demands that arise due to extreme co movements and find a substantial shift of the portfolio holdings toward the risk free asset we demonstrate that accounting for dependence between extreme events in portfolio decisions leads to significant economic gains that stem primarily from intertemporal hedging motives these findings are robust along alternative modeling assumptions of extreme co movements and conditional correlation

laboratory subjects as multiproduct monopoly firms an experimental investigation abstract previous experimental research demonstrates that market responses of laboratory subjects as monopoly firms converge to theoretic predictions this research increases the complexity of market decisions facing such subjects each subject is established as a multiproduct monopoly firm capable of producing two distinct goods in this environment the seller must select a selling strategy from limited alternatives and offer prices results show that market responses of subjects are more likely to converge to multiproduct monopoly model predictions when strategy options are relatively simple or when greater rewards are present results are consistent with profit maximizing behavior

what factors drive systemic risk during international financial crises abstract we analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises we find no empirical evidence supporting conjectures that bank size leverage non interest income or the quality of the bank s credit portfolio are persistent determinants of systemic risk across financial crises in contrast our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime we also confirm for the subprime crisis that the banks contribution to moderately bad tail events in the past predicts the financial sector s crash risk

dynamic correlation analysis of financial contagion evidence from asian markets we apply a dynamic conditional correlation model to nine asian daily stock return data series from 1990 to 2003 the empirical evidence confirms a contagion effect by analyzing the correlation coefficient series we identify two phases of the asian crisis the first shows an increase in correlation contagion the second shows a continued high correlation herding statistical analysis of the correlation coefficients also finds a shift in variance during the crisis period casting doubt on the benefit of international portfolio diversification evidence shows that international sovereign credit rating agencies play a significant role in shaping the structure of dynamic correlations in the asian markets

financial contagion and asset pricing abstract 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

distinguished lecture on economics in government the private uses of public interests incentives and institutions as a long time student of the public sector i welcomed the opportunity to come to washington as a member of the council of economic advisers and later to become the chairman of the council partly because it gave me an opportunity to study at first hand this immensely important part of our economy and society and to test my ideas against the reality of government in action to be sure i came also as an activist if not with a fully articulated agenda at least with a view about what it was that government should and should not be doing my reference point was the fundamental theorems of welfare economics which as some describe them proved that the market left to itself would produce efficient allocations many saw in these theorems the vindication of adam smith s faith in the invisible hand leading the self interested decisions of each person to maximize the well being of the nation as a whole today many of us look at the fundamental theorem not as a description of the world but as an explication of the conditions under which a market equilibrium will be pareto efficient these conditions are quite strong the importance of some of the more explicit assumptions like the lack of externalities and the completeness of markets has long been known in the last two decades we have explored much more seriously the consequences of the informational assumptions implicit in the belief that markets are efficient in particular it has been shown that in the presence of imperfect information or incomplete markets the economy will not be pareto efficient in other words there joseph stiglitz is senior vice president and chief economist world bank washington d c stiglitz was a member of the council of economic advisers from 1993 95 and chairman

international transmission of stock market movements this paper investigates the international transmission mechanism of stock market movements by estimating a nine market vector autoregression var system using simulated responses of the estimated var system we i locate all the main channels of interactions among national stock markets and ii trace out the dynamic responses of one market to innovations in another generally speaking a substantial amount of multi lateral interaction is detected among national stock markets innovations in the u s are rapidly transmitted to other markets in a clearly recognizable fashion whereas no single foreign market can significantly explain the u s market movements also the dynamic response pattern is found to be generally consistent with the notion of informationally efficient international stock markets

the dependence and risk spillover between crude oil market and china stock market new evidence from a variational mode decomposition based copula method abstract this paper examines the dependence structure between crude oil market and china stock market over different investment horizons before and after the recent financial crisis by combining the variational mode decomposition vmd method with various static and time varying copulas based on the decomposed time series and the copula dependence the value at risk var conditional var covar and delta covar covar are quantified to analyze the upside and downside risk spillovers from oil market to china stock market in raw short and long run investment horizons before and after the financial crisis the empirical results show that first the recent financial crisis enhances the dependences between the crude oil market and china stock market and the long run dependence increases more significantly than that of short run for the raw return series there are symmetric upper and lower tail dependencies in full sample and pre crisis subsample periods but an average dependence in post crisis subsample period second the var of china stock market increases heavily around the financial crisis but the average var after the crisis deceases compared to the risk before the crisis third the risk spillovers from crude oil price to china stock market are found in each sample periods before the crisis however it mainly exists in long run horizon while after the crisis it happens in both short and long run horizons finally the risk spillovers from oil price to china stock market display strong asymmetric features with larger long term downside risk spillovers in post crisis subsample

are stock market crises contagious the role of crisis definitions abstract 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

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

extreme us stock market fluctuations in the wake of 9 11 we apply extreme value analysis to us sectoral stock indices in order to assess whether tail risk measures like value at risk and extremal linkages were significantly altered by 9 11 we test whether semi parametric quantile estimates of downside risk and upward potential have increased after 9 11 the same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio the latter probabilities measure the sectoral response to macro shocks during periods of financial stress so called tail s taking 9 11 as the sample midpoint we find that tail s often increase in a statistically and economically significant way this might be due to perceived risk of new terrorist attacks copyright 2008 john wiley sons ltd

evaluation of contagion or interdependence in the financial crises of asia and latin america considering the macroeconomic fundamentals this article investigates the existence of contagion between countries on the basis of an analysis of returns for stock indices over the period 1994 to 2003 the econometrics methodology used is that of multivariate generalized autoregressive conditional heteroscedasticity garch family volatility models particularly the dynamic conditional correlation dcc models in the form proposed by engle and sheppard 2001 the returns were duly corrected for a series of country specific fundamentals the relevance of this procedure is highlighted in the literature by the work of pesaran and pick 2003 the results obtained in this article provide evidence favourable for the hypothesis of regional contagion in both latin america and asia as a rule contagion spread from the asian crisis to latin america but not in the opposite direction

transatlantic systemic risk in this paper we study systemic risk for the us and europe we show that banks exposures to common risk factors are crucial for systemic risk we come to this conclusion by rst showing that relations between us and european banks are smaller than within each region we then show that european banks react more strongly to the onset of the nancial crisis than us ones regarding the consequences of systemic risk we show that dependence between the banking sector and a wide range of real sectors is limited our results imply that regulators and supervisors should address international bank dependencies arising from common risk factors while recessions in real sectors due to bank defaults should be a secondary concern

hourly volatility spillovers between international equity markets abstract this paper examines the timing of mean and volatility spillovers between new york and london equity markets using an arch model it is found that the evidence of volatility spillovers between these markets is minimal and have a duration which lasts only an hour or so the most significant effects surround the movement of share prices around the new york opening but these results are not strong several new arch models are estimated including an asymmetric or leverage model and a non linear model which allows big shocks to have a different impact from small shocks

flexible multivariate garch modeling with an application to international stock markets this paper offers a new approach to estimating time varying covariance matrices in the framework of the diagonal vech version of the multivariate garch 1 1 model our method is numerically feasible for large scale problems produces positive semidefinite conditional covariance matrices and does not impose unrealistic a priori restrictions we provide an empirical application in the context of international stock markets comparing the new estimator with a number of existing ones

an econometric analysis of some models for constructed binary time series macroeconometric and financial researchers often use binary data constructed in a way that creates serial dependence we show that this dependence can be allowed for if the binary states are treated as markov processes in addition the methods of construction ensure that certain sequences are never observed in the constructed data together these features make it difficult to utilize static and dynamic probit models we develop modeling methods that respect the markov process nature of constructed binary data and explicitly deals with censoring constraints an application is provided that investigates the relation between the business cycle and the yield spread

contagion and trade why are currency crises regional abstract currency crises tend to be regional they affect countries in geographic proximity this suggests that patterns of international trade are important in understanding how currency crises spread above and beyond any macroeconomic phenomena we provide empirical support for this hypothesis using data for five different currency crises in 1971 1973 1992 1994 and 1997 we show that currency crises affect clusters of countries tied together by international trade by way of contrast macroeconomic and financial influences are not closely associated with the cross country incidence of speculative attacks

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

the pricing of tail risk and the equity premium evidence from international option markets we explore the pricing of tail risk as manifest in index options across international equity markets the risk premium associated with negative tail events displays persistent shifts unrelated to

the world price of jump and volatility risk abstract we study international integration of markets for jump and volatility risk using index option data for the main global markets to explain the cross section of expected option returns we focus on return based multi factor models for each market separately we provide evidence that volatility and jump risk are priced risk factors there is little evidence however of global unconditional pricing of these risks we show that uk and us option markets have become increasingly interrelated and using conditional pricing models generates some evidence of international pricing finally the benefits of diversifying jump and volatility risk internationally are substantial but declining

financial contagion on the international trade network we combine data on international trade linkages with a network approach to map the global trading system as an interdependent complex network this enables us to obtain indicators of how well connected a country is into the global trading system we use these network based measures of connectedness to explain stock market returns during recent episodes of financial crisis we find that a crisis is amplified if the epicenter country is better integrated into the trade network however target countries affected by such a shock are in turn better able to dissipate the impact if they are well integrated into the network a network approach can help explain why the mexican asian and russian financial crises were highly contagious while the crises that originated in venezuela and argentina did not have such a virulent effect we suggest that a network approach incorporating the cascading and diffusion of interdependent ripples when a shock hits a specific part of the global trade network provides us with an improved explanation of financial contagion jel f10 f36 f40 g15

the dark side of global integration increasing tail dependence abstract we measure stock market coexceedances using the methodology of cappiello gerard and manganelli 2005 ecb working paper 501 this method enables us to measure comovement at each point of the return distribution first we construct annual coexceedance probabilities for both lower and upper tail return quantiles using daily data from 1974 2006 next we explain these probabilities in a panel gravity model framework results show that macroeconomic variables asymmetrically impact stock market comovement across the return distribution financial liberalization significantly increases left tail comovement whereas trade integration significantly increases comovement across all quantiles decreasing exchange rate volatility results in increasing lower tail comovement the introduction of the euro increases comovement across the entire return distribution thereby significantly reducing the benefits of portfolio diversification within the euro area

bubble thy neighbor portfolio effects and externalities from capital controls we use changes in brazil s tax on capital inflows from 2006 to 2013 to test for direct portfolio effects and externalities from capital controls on investor portfolios we find that an increase in brazil s tax on foreign investment in bonds causes fund managers to significantly decrease their portfolio allocations to brazil in both bonds and equities fund managers simultaneously increase allocations to other countries that have substantial exposure to china and decrease allocations to countries viewed as more likely to adjust their capital controls much of the effect of capital controls on portfolio allocation appears to occur through signalling i e changes in investor expectations about future policies rather than the direct cost of the controls this evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries

co movements and spillovers of oil and renewable firms under extreme conditions new evidence from negative wti prices during covid 19 we test for the existence of volatility spillovers and co movements among energy focused corporations during the outbreak of the covid 19 pandemic inclusive of the april 2020 events where west texas intermediate wti oil future prices became negative employing the spillover index approach of diebold and yilmaz 2012 as well as developing a dcc figarch conditional correlation framework and using estimated spillover indices built on a generalised vector autoregressive framework in which forecast error variance decompositions are invariant to the variable ordering we examine the sectoral transmission mechanisms of volatility shocks and contagion throughout the energy sector among several results we find positive and economically meaningful spillovers from falling oil prices to both renewable energy and coal markets however this result is only found for the narrow portion of our sample surrounding the negative wti event we interpret our results being directly attributed to a sharp drop in global oil gas and coal demand rather than because of a sudden increase in oil supply while investors observed the us fracking industry losing market share to coal they also viewed renewables as more reliable mechanism to generate long term stable and low cost supply

the anatomy of sovereign risk contagion the channels for the cross border propagation of sovereign risk in the international sovereign debt market are analysed identifying sovereign credit events as extraordinary jumps in cds spreads we distinguish between the immediate effects of such events and their longer term spillover effects to analyse fast and furious contagion we use daily cds data to conduct event studies around a total of 89 identified credit events in a global country sample to analyse slow burn spillover effects we apply a multifactor risk model distinguishing between global and regional risk factors we find that fast and furious contagion has been primarily a regional phenomenon whilst slow burn spillover effects can often be global in scope especially those of the recent european debt crisis the global risk factors are found to be driven by investor risk appetites and debt levels whilst the regional factors depend on economic fundamentals of countries within a region

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration

international diversification during the financial crisis a blessing for equity investors abstract this paper empirically investigates international equity investors foreign portfolios before and during the financial crisis by estimating a gravity model for 22 source and 42 destination countries during 2001 2009 the results show a significant negative relationship between foreign equity holdings and stock market correlations during the financial crisis while there is no relationship before the crisis when distinguishing between active and passive rebalancing the results clearly indicate a significantly negative relationship between active rebalancing and correlations during the crisis these findings hold as well at the individual country level when allowing for source country specific coefficients an analysis from the perspective of each source country s representative investor who optimizes mean variance utility shows that active rebalancing provides sizeable utility gains during the crisis finally there is even a significantly negative relationship between future correlations and active rebalancing since 2007 suggesting that prior to the crisis investors already repositioned their country weights to markets with lower correlation during 2008 2009

conditional coskewness in stock and bond markets time series evidence in the context of a three moment intertemporal capital asset pricing model specification we characterize conditional coskewness between stock and bond excess returns using a bivariate regime switching model we find that both conditional u s stock coskewness the relation between stock return and bond volatility and bond coskewness the relation between bond return and stock volatility command statistically and economically significant negative ex ante risk premiums the impacts of stock and bond coskewness on the conditional stock and bond premiums are quite robust to various model specifications and various sample periods and also hold in another major developed country the united kingdom the findings also carry important implications for portfolio management