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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. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," CESifo Working Paper Series 1425, CESifo Group Munich.
  2. Abdul Hakim & Michael McAleer, 2009. "Modelling the Interactions Across International Stock, Bond and Foreign Exchange Markets," CIRJE F-Series CIRJE-F-663, CIRJE, Faculty of Economics, University of Tokyo.
  3. 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.
  4. Toni Gravelle & Maral Kichian & James Morley, 2003. "Shift Contagion in Asset Markets," Working Papers 03-5, Bank of Canada.
  5. Arghyrou, Michael G. & Kontonikas, Alexandros, 2012. "The EMU sovereign-debt crisis: Fundamentals, expectations and contagion," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 658-677.
  6. 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.
  7. Silvia Sgherri & Alessandro Galesi, 2009. "Regional Financial Spillovers Across Europe," IMF Working Papers 09/23, International Monetary Fund.
  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.
  9. 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.
  10. Roberto Rigobon & Brian Sack, 2003. "Spillovers Across U.S. Financial Markets," NBER Working Papers 9640, National Bureau of Economic Research, Inc.
  11. 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.
  12. John Beirne & Guglielmo Maria Caporale & Marianne Schulze-Ghattas & Nicola Spagnolo, 2009. "Volatility Spillovers and Contagion from Mature to Emerging Stock Markets," Discussion Papers of DIW Berlin 873, DIW Berlin, German Institute for Economic Research.
  13. 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.
  14. Roberto Rigobon, 2000. "Identification through Heteroskedasticity: Measuring "Contagion: betweenArgentinean and Mexican Sovereign Bonds," NBER Working Papers 7493, National Bureau of Economic Research, Inc.
  15. 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.
  16. 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.
  17. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 0354, European Central Bank.
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Cited by:
  1. TRENCA Ioan & PETRIA Nicolae & DEZSI Eva, 2014. "Linkages Between The Stock Markets Of Eastern Europe," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 66(1), pages 91-104.
  2. Dimitris Kenourgios & Dimitrios Dimitriou, 2014. "Contagion Effects of the Global Financial Crisis in US and European Real Economy Sectors," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(3), pages 275-288, June.

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