The "Big C": Identifying Contagion
AbstractThis paper surveys and assesses the academic literature on defining, measuring, and identifying financial contagion and the various channels by which it can occur. It also includes new empirical analysis of recent trends and causes of contagion, highlighting contagion risks in the euro area. The paper defines “interdependence” as high correlations across markets during all states of the world and “contagion” as the spillovers from extreme negative events. Interdependence has increased dramatically over time, especially within the euro area, even after controlling for global shocks and changes in volatility. Not surprisingly, negative events in one country also quickly affect others. Regression analysis shows that a country is more vulnerable to contagion if it has a more levered banking system, greater trade exposure, weaker macroeconomic fundamentals, and larger international portfolio investment liabilities. Countries are less vulnerable, however, if they have larger international portfolio investment assets (which can provide a buffer against shocks) and are less reliant on debt (versus equity) for international financing. These results have important implications for understanding contagion and for analyzing policies designed to mitigate contagion, especially for the current crisis in the euro area.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18465.
Date of creation: Oct 2012
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Find related papers by JEL classification:
- F0 - International Economics - - General
- F1 - International Economics - - Trade
- F15 - International Economics - - Trade - - - Economic Integration
- F2 - International Economics - - International Factor Movements and International Business
- F3 - International Economics - - International Finance
- G01 - Financial Economics - - General - - - Financial Crises
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
- NEP-EEC-2012-10-27 (European Economics)
- NEP-IFN-2012-10-27 (International Finance)
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- Beniamino Moro, 2013. "The Run On Repo and the Liquidity Shortage Problems of the Current Global Financial Crisis: Europe vs. The US," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(1), pages 41-77, January.
- Irfan Akbar Kazi & Suzanne Salloy, 2013. "Contagion effect due to Lehman Brothers’ bankruptcy and the global financial crisis - From the perspective of the Credit Default Swaps’ G14 dealers," EconomiX Working Papers 2013-6, University of Paris West - Nanterre la Défense, EconomiX.
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