Financial turmoil: Systemic or regional?

This paper summarizes “The Center and the Periphery: The Globalization of Financial Shocks," which presents a new approach to measure and understand systemic financial turbulences. We defined two measures of systemic disturbances: weak- and strong-form globalization and created the corresponding indices of “globalization.” These indices allowed us to capture the routes through which market jitters in one country reach other countries in the same region or even worldwide. They also allowed us to estimate the likelihood of low to high globalization following a variety of shocks in crisis-prone emerging markets and financial centers. One of the preliminary conclusions we draw from this exercise is that financial centers are at the core of “systemic” problems: The “worldwide globalization” of the turbulences in Asia in the Fall of 1997 only occurred after the stock market crash in the United States on October 27, while the Russian downfall spread around the globe only after it triggered fragilities in German banks and helped to provoke LTCM’s recapitalization.