IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v54y2020ics1062940819302864.html
   My bibliography  Save this article

Contagion effects and risk transmission channels in the housing, stock, interest rate and currency markets: An Empirical Study in China and the U.S

Author

Listed:
  • Wang, Peiwan
  • Zong, Lu

Abstract

This paper aims to investigate the crisis linkage and transmission channels within the housing, stock, interest rate and the currency markets in the U.S. and China in the past decade since the 2008 Subprime Mortgage Crisis. Two hybrid models, namely the SWARCH-EVT-Copula and the Bivariate SWARCH-EVT models, are proposed and applied in order to take into account (A) the high/low volatility regimes, (B) the interdependence structure inherited from the joint tail behaviours, as well as, (C) the risk spillover dynamics among financial sectors during market turmoils. We empirically show that the housing and stock markets share the strongest linkage and play central roles in the spreading of shocks. With a highly integrated system, the American financial sectors are under greater exposure to risk contagion and systemic risk during crises than the Chinese markets. Nevertheless, the exchange rate risk of Renminbi remains at an intensive level since its “crawl-like arrangement” and leads to increasing co-movements in the stock and interest rate markets since 2014.

Suggested Citation

  • Wang, Peiwan & Zong, Lu, 2020. "Contagion effects and risk transmission channels in the housing, stock, interest rate and currency markets: An Empirical Study in China and the U.S," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940819302864
    DOI: 10.1016/j.najef.2019.101113
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940819302864
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2019.101113?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Allen, David E. & Singh, Abhay K. & Powell, Robert J., 2013. "EVT and tail-risk modelling: Evidence from market indices and volatility series," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 355-369.
    2. Jozef Baruník & Tomáš Křehlík, 2018. "Measuring the Frequency Dynamics of Financial Connectedness and Systemic Risk," Journal of Financial Econometrics, Oxford University Press, vol. 16(2), pages 271-296.
    3. Martin Hoesli & Kustrim Reka, 2015. "Contagion Channels between Real Estate and Financial Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 101-138, March.
    4. Korobilis, D & Yilmaz, K, 2018. "Measuring Dynamic Connectedness with Large Bayesian VAR Models," Essex Finance Centre Working Papers 20937, University of Essex, Essex Business School.
    5. Holger Fink & Yulia Klimova & Claudia Czado & Jakob Stober, 2016. "Regime switching vine copula models for global equity and volatility indices," Papers 1604.05598, arXiv.org.
    6. Caporin, Massimiliano & Gupta, Rangan & Ravazzolo, Francesco, 2021. "Contagion between real estate and financial markets: A Bayesian quantile-on-quantile approach," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    7. Aviral Kumar Tiwari & Christophe André & Rangan Gupta, 2020. "Spillovers between US real estate and financial assets in time and frequency domains," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 38(6), pages 525-537, April.
    8. Dißmann, J. & Brechmann, E.C. & Czado, C. & Kurowicka, D., 2013. "Selecting and estimating regular vine copulae and application to financial returns," Computational Statistics & Data Analysis, Elsevier, vol. 59(C), pages 52-69.
    9. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
    10. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-593, Sept.-Oct.
    11. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    12. Chan, Kam Fong & Treepongkaruna, Sirimon & Brooks, Robert & Gray, Stephen, 2011. "Asset market linkages: Evidence from financial, commodity and real estate assets," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1415-1426, June.
    13. Hui, Eddie Chi-man & Chan, Ka Kwan Kevin, 2014. "The global financial crisis: Is there any contagion between real estate and equity markets?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 405(C), pages 216-225.
    14. BenMim, Imen & BenSaïda, Ahmed, 2019. "Financial contagion across major stock markets: A study during crisis episodes," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 187-201.
    15. Aloui, Riadh & Ben Aïssa, Mohamed Safouane, 2016. "Relationship between oil, stock prices and exchange rates: A vine copula based GARCH method," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 458-471.
    16. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    17. Mardi Dungey & Renee Fry & Brenda Gonzalez-Hermosillo & Vance Martin, 2005. "Empirical modelling of contagion: a review of methodologies," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 9-24.
    18. Edwards, Sebastian & Susmel, Raul, 2001. "Volatility dependence and contagion in emerging equity markets," Journal of Development Economics, Elsevier, vol. 66(2), pages 505-532, December.
    19. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
    20. Aas, Kjersti & Czado, Claudia & Frigessi, Arnoldo & Bakken, Henrik, 2009. "Pair-copula constructions of multiple dependence," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 182-198, April.
    21. Mardi Dungey & Vance L. Martin, 2004. "A Multifactor Model of Exchange Rates with Unanticipated Shocks: Measuring Contagion in the East Asian Currency Crisis," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(3), pages 305-330, December.
    22. BenSaïda, Ahmed, 2018. "The contagion effect in European sovereign debt markets: A regime-switching vine copula approach," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 153-165.
    23. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
    24. Zhang, Guofu & Liu, Wei, 2018. "Analysis of the international propagation of contagion between oil and stock markets," Energy, Elsevier, vol. 165(PA), pages 469-486.
    25. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
    26. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    27. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
    28. Cubillos-Rocha, Juan S. & Gomez-Gonzalez, Jose E. & Melo-Velandia, Luis F., 2019. "Detecting exchange rate contagion using copula functions," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 13-22.
    29. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brož, Václav & Kočenda, Evžen, 2022. "Mortgage-related bank penalties and systemic risk among U.S. banks," Journal of International Money and Finance, Elsevier, vol. 122(C).
    2. Vukovic, Darko B. & Lapshina, Kseniya A. & Maiti, Moinak, 2021. "Wavelet coherence analysis of returns, volatility and interdependence of the US and the EU money markets: Pre & post crisis," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    3. Jingyi TIAN & Jun NAGAYASU, 2024. "AI and Financial Systemic Risk in the Global Market," TUPD Discussion Papers 55, Graduate School of Economics and Management, Tohoku University.
    4. Wang, Xiangning & Huang, Qian & Zhang, Shuguang, 2023. "Effects of macroeconomic factors on stock prices for BRICS using the variational mode decomposition and quantile method," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    5. Kočenda, Evžen & Moravcová, Michala, 2024. "Frequency volatility connectedness and portfolio hedging of U.S. energy commodities," Research in International Business and Finance, Elsevier, vol. 69(C).
    6. Tsai, I-Chun, 2022. "Changes in social behavior and impacts of the COVID-19 pandemic on regional housing markets: Independence and risk," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    7. Kola Ijasan & Peterson Owusu Junior & George Tweneboah & Tunbosun Oyedokun & Anokye M. Adam, 2021. "Analysing the relationship between global REITs and exchange rates: Fresh evidence from frequency-based quantile regressions," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(3), pages 58-91, September.
    8. Xin Chen & Zhangming Shan & Decai Tang & Biao Zhou & Valentina Boamah, 2023. "Interest rate risk of Chinese commercial banks based on the GARCH-EVT model," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-11, December.
    9. Peng, Qing & Li, Jie & Zhao, Yu & Wu, Han, 2021. "The informational content of implied volatility: Application to the USD/JPY exchange rates," Journal of Asian Economics, Elsevier, vol. 76(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lopes, José Mário & Nunes, Luis C., 2012. "A Markov regime switching model of crises and contagion: The case of the Iberian countries in the EMS," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1141-1153.
    2. Peiwan Wang & Lu Zong & Ye Ma, 2019. "An Integrated Early Warning System for Stock Market Turbulence," Papers 1911.12596, arXiv.org.
    3. Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 373-401, June.
    4. Gallo, Giampiero M. & Otranto, Edoardo, 2008. "Volatility spillovers, interdependence and comovements: A Markov Switching approach," Computational Statistics & Data Analysis, Elsevier, vol. 52(6), pages 3011-3026, February.
    5. King, Daniel & Botha, Ferdi, 2015. "Modelling stock return volatility dynamics in selected African markets," Economic Modelling, Elsevier, vol. 45(C), pages 50-73.
    6. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
    7. Maziar Sahamkhadam & Andreas Stephan, 2019. "Portfolio optimization based on forecasting models using vine copulas: An empirical assessment for the financial crisis," Papers 1912.10328, arXiv.org.
    8. Hatice Gaye Gencer & Sercan Demiralay, 2016. "The Contagion Effects on Real Economy: Emerging Markets during the Recent Crises," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 104-121, March.
    9. Kim Hiang Liow & Qing Ye, 2018. "Regime dependent volatilities and correlation in international securitized real estate markets," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(3), pages 457-487, August.
    10. Diebold, Francis X. & Yilmaz, Kamil, 2015. "Financial and Macroeconomic Connectedness: A Network Approach to Measurement and Monitoring," OUP Catalogue, Oxford University Press, number 9780199338306.
    11. Chang, Kuang-Liang, 2022. "Do economic policy uncertainty indices matter in joint volatility cycles between U.S. and Japanese stock markets?," Finance Research Letters, Elsevier, vol. 47(PA).
    12. Serge Darolles & Jérémy Dudek & Gaëlle Le Fol, 2015. "Contagion in Emerging Markets," Palgrave Macmillan Books, in: Nigel Finch (ed.), Emerging Markets and Sovereign Risk, chapter 3, pages 45-58, Palgrave Macmillan.
    13. Giovanna Bua & Carmine Trecroci, 2019. "International equity markets interdependence: bigger shocks or contagion in the 21st century?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 155(1), pages 43-69, February.
    14. Kasahara, Hiroyuki & Shimotsu, Katsumi, 2019. "Asymptotic properties of the maximum likelihood estimator in regime switching econometric models," Journal of Econometrics, Elsevier, vol. 208(2), pages 442-467.
    15. Zheng, Tingguo & Zuo, Haomiao, 2013. "Reexamining the time-varying volatility spillover effects: A Markov switching causality approach," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 643-662.
    16. Maria Kasch & Massimiliano Caporin, 2013. "Volatility Threshold Dynamic Conditional Correlations: An International Analysis," Journal of Financial Econometrics, Oxford University Press, vol. 11(4), pages 706-742, September.
    17. Francois Chesnay & Eric Jondeau, 2001. "Does Correlation Between Stock Returns Really Increase During Turbulent Periods?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(1), pages 53-80, February.
    18. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis: A multivariate Markov-switching analysis," Economic Modelling, Elsevier, vol. 29(3), pages 943-973.
    19. Ferreiro Javier Ojea, 2019. "Structural change in the link between oil and the European stock market: implications for risk management," Dependence Modeling, De Gruyter, vol. 7(1), pages 53-125, January.
    20. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284, Edward Elgar Publishing.

    More about this item

    Keywords

    Contagion effect; Markov switching regime; Vine copula; EVT; C32; C38; G01; G11;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940819302864. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.