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Interdependence and contagion in global asset markets

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  • Beirne, John
  • Gieck, Jana

Abstract

This paper provides an empirical assessment of interdependence and contagion across three asset classes (bonds, stocks, and currencies) for over 60 economies over the period 1998 to 2011. Using a global VAR, we test for changes in the transmission mechanism – both within and cross-market changes - during periods of turbulence in financial markets. Our results suggest that within-market effects over the sample period for each asset market are highly significant for advanced economies. For emerging economies, these within-market effects mostly apply to the equity market. Contagion effects within-market are most notable in Latin America and Emerging Asia for equities. Cross-market contagion is identified from global bonds to local stocks in Central and Eastern Europe, but from global stocks to domestic bonds in the case of advanced economies. Impulse responses indicate that in crisis times, the origin of the shock plays an important role on the nature of the global transmission. The evidence suggests that in times of financial crisis, shocks that emanate in the US, particularly equity shocks, lead to risk aversion by investors in equities and currencies globally and in some emerging market bonds. Euro area shocks tend to have the most significant effect within the bond market. Our results have implications for policymakers in terms of understanding financial exposures and vulnerabilities and for investors in relation to portfolio rebalancing and the construction of portfolio diversification strategies across asset classes in crisis and non-crisis times. JEL Classification: F30, G15

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1480.

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Date of creation: Oct 2012
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Handle: RePEc:ecb:ecbwps:20121480

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Keywords: asset markets; Contagion; Global VAR;

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References

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  1. Roberto Rigobon & Brian Sack, 2003. "Spillovers across U.S. financial markets," Finance and Economics Discussion Series 2003-13, Board of Governors of the Federal Reserve System (U.S.).
  2. John Beirne & Guglielmo Maria Caporale & Marianne Schulze-Ghattas & Nicola Spagnolo, 2009. "Volatility Spillovers and Contagion from Mature to Emerging Stock Markets," CESifo Working Paper Series 2545, CESifo Group Munich.
  3. Arghyrou, Michael G. & Kontonikas, Alexandros, 2011. "The EMU sovereign-debt crisis: fundamentals, expectations and contagion," SIRE Focus Papers 2011-01, Scottish Institute for Research in Economics (SIRE).
  4. Bekaert, Geert & Ehrmann, Michael & Fratzscher, Marcel & Mehl, Arnaud, 2011. "Global crises and equity market contagion," CEPR Discussion Papers 8438, C.E.P.R. Discussion Papers.
  5. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Working Paper Series 1625, European Central Bank.
  6. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
  7. Cerra, Valerie & Saxena, Sweta Chaman, 2002. "Contagion, Monsoons, and Domestic Turmoil in Indonesia's Currency Crisis," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 36-44, February.
  8. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005. "'Some contagion, some interdependence': More pitfalls in tests of financial contagion," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1177-1199, December.
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  10. Roberto Rigobon, 2000. "Identification through Heteroskedasticity: Measuring "Contagion: betweenArgentinean and Mexican Sovereign Bonds," NBER Working Papers 7493, National Bureau of Economic Research, Inc.
  11. Baur, Dirk & Schulze, Niels, 2005. "Coexceedances in financial markets--a quantile regression analysis of contagion," Emerging Markets Review, Elsevier, vol. 6(1), pages 21-43, April.
  12. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  13. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 0354, European Central Bank.
  14. Serwa, Dobromil & Bohl, Martin T., 2005. "Financial contagion vulnerability and resistance: A comparison of European stock markets," Economic Systems, Elsevier, vol. 29(3), pages 344-362, September.
  15. Silvia Sgherri & Alessandro Galesi, 2009. "Regional Financial Spillovers Across Europe," IMF Working Papers 09/23, International Monetary Fund.
  16. Caporale, Guglielmo Maria & Cipollini, Andrea & Spagnolo, Nicola, 2005. "Testing for contagion: a conditional correlation analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 476-489, June.
  17. Toni Gravelle & Maral Kichian & James Morley, 2003. "Shift Contagion in Asset Markets," Working Papers 03-5, Bank of Canada.
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