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Financial Contagion between Economies - an Exploratory Spatial Analysis

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  • Oscar Villar

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  • Esther Vayá

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Abstract

At the present time, controversy still surrounds the importance of the financial integration of markets and its possible consequences. The fact that the economy is more global means that countries are more interdependent on each other. This brings new advantages, but also entails new dangers for countries. In this paper we study one of these dangers: financial contagion in times of crisis. In general terms, this is understood as the transmission or propagation of disturbances between the financial markets of different countries. However, this debate on the benefits and risks of economic interdependence also draws attention to problems that are both very old and very new. The problems are new because of the impact of globalization, but old because they are based on economic and political visions and ideologies that always remain the same. In this paper we present new ideas on the current debate on financial contagion. Specifically, we identify the economic variables that represent the crises in the Thai, Russian and Brazilian cases. We ask whether the cause of contagion between countries is the fact that their main macro economic magnitudes or economic fundamentals are at critical levels (commonly considered as the fundamentals of countries), or if, on the other hand, contagion between countries takes place due to trade and financial links and political or regional effects. Various methodological approaches have been used to explore the existence of contagion and the relative importance of the possible channels of transmission of crises (or channels of contagion). In recent years authors have sought to identify the econometric techniques that are best suited to conducting this kind of analysis. Indeed, one of the innovations of this paper is its implementation of Spatial Econometrics as a mechanism for assessing contagion. Unlike the other methodologies used, Spatial Econometrics allows an expression of international relations under explicit dynamic-spatial assumptions. Surprisingly, this technique has not been used previously for the analysis of contagion, and indeed few authors have used it in the study of financial relations in general. Firstly, in this paper we perform an exploratory spatial analysis which contrasts the existence of contagion or spatial autocorrelation. Secondly, we try to assess different channels of contagion through a model based on spatial econometric which would let us realize a confirmatory analysis. The study of an explicit dependency between the countries using this econometric technique may open up a new field of research in financial interdependence relations.

Suggested Citation

  • Oscar Villar & Esther Vayá, 2005. "Financial Contagion between Economies - an Exploratory Spatial Analysis," ERSA conference papers ersa05p574, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa05p574
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    References listed on IDEAS

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    1. Taimur Baig & Ilan Goldfajn, 1999. "Financial Market Contagion in the Asian Crisis," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1-3.
    2. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
    3. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    4. 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.
    5. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 603-617, August.
    6. Paelinck, J., 1978. "Spatial econometrics," Economics Letters, Elsevier, vol. 1(1), pages 59-63.
    7. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    8. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
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    Cited by:

    1. Tam, Pui Sun, 2014. "A spatial–temporal analysis of East Asian equity market linkages," Journal of Comparative Economics, Elsevier, vol. 42(2), pages 304-327.
    2. Viviana Fernández, 2007. "The behavior of stock returns in the Asia-Pacific mining industry following the Iraq war," Documentos de Trabajo 243, Centro de Economía Aplicada, Universidad de Chile.
    3. Viviana Fernandez, 2011. "Spatial linkages in international financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 11(2), pages 237-245.

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