When one nations financial health suffers, the malaise tends to spread. Forbes and rigobon 2002 define contagion as a significant increase of the correlations between the markets and. Section ii and iii study how globalization can lead to financial crises and contagion. On the empirical front, determiningwhen returns are excessive is a precondition for designing effective policy response to crises. Identifying and mitigating contagion kansas city fed. Conceptual and emperical issues, editor stijn claessens international financial contagion, kluwer academic publishers p. Portfolio diversification, leverage, and financial contagion. Although aprofessional consensus on the appropriate definitions of contagion has yet to emerge, we document substantial research progress towards this goal. In order to discriminate among several disequilibrium situations we propose to test contagion on the basis of a twostep procedure. The literature argues that financial crises spread across countries in two main ways. Stijn claessens, rudiger dornbusch, yung chul park. The term financial contagion 5was rarely used before 1995, and then only occasionally appeared in articles discussing the impact of the mexican peso crisis on other countries in latin america.
Nonetheless, the risk of international financial contagion during future crises still exists. Financial contagion on the international trade network. Consistent with the findings of forbes and rigobon 2002 in other crises episodes, the widespread and large decline in stock markets in emerging markets during the u. Here, scholars have tried to track out the causes of such crises in the first place and then the contagion of those crises to other countries. When one nations financial health suffers, the malaise tends. Financial crisis and contagion effects to indian stock. Stock market interdependence, contagion, and the u. Financial contagion refers to the spread of market disturbances mostly on the downside from one country to the other, a process observed through comovements in exchange rates, stock prices, sovereign spreads, and capital flows. Agreeing with scholars who stated that financial market contagion occurred during the crisis is therefore logical. Financial crisis and contagion effects to indian stock market. Goldfajn 1999 financial market contagion in the asian crisis, imf staff papers, 46, 16795. It is necessary to distinguish between interconnection and contagion. Introductory chapter of international financial contagion, edited by stijn claessens and kristin forbes.
The study applies the dynamic conditional correlation dcc bivariate generalized autoregressive conditional heteroskedasticity garch model of engle in order to capture the contagion effects during global financial crisis. A lexisnexis search for contagion before this year finds hundreds of examples in major newspapers, almost none of which refer to turmoil in international financial markets. How it spreads and how it can be stopped for which this paper was written. We used daily stock returns for the period january 2002december 2011 to study the contagion effects from the united states us to india. International financial contagion, which happens in both advanced. Financial contagion refers to the spread of market disturbances mostly on the downside. F3 abstract using accounting data for 7722 nonfinancial firms in 42 countries, we examine how the 20072009. International monetary fund institute for capacity. The three main financial markets that are used in the contagion literature are the international stock, bond and foreign exchange markets. Essays on financial contagion and financial crises dineshprasadgajurel mphil,ma,mbs,llb,bbs tasmanianschoolofbusinessandeconomics universityoftasmania. Financial market contagion during the global financial crisis. The aim of this paper is to look for evidence of financial contagion suffered by several countries as a result of the latest argentine crisis.
Section v discusses the policy options and section vi concludes. Forbes and rigobon 2002 described the current imprecision and. Developing countries and the international capital markets arturo c. A recent book by claessens and forbes 2001 published this and more than 20 other articles from a february 2000 world bankimf conference, international financial contagion. It helps explain an economic crisis extending across neighboring countries, or even regions. This paper provides an overview of recent theories of international financial contagion, with a focus on models in which the balance sheet constraints of global banks and other financial institutions are the key channel of international transmission.
Werner 2001 contagion of international financial crises. The effect of equity barriers on foreign investment in developing countries, nber working papers 4579, national bureau of economic research, inc. Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. In such a world, the international financial system will need to change in order to offer better preventive and reactive policy. Portfolio diversification, leverage, and financial contagion garry j. New post fulltext search for articles, highlighting downloaded books, view pdf in a browser and download history correction in our blog. It begins by discussing how to define contagion, the theoretical evidence on how it might occur, and the empirical literature evaluating its causes during the financial crises of the 1990s. Lessons and policy implications from the global financial. From the late 1990s, then, economics witnessed a pronounced biological turn, as economists began to instate models from epidemiology to describe the dynamics of financial contagion. There has been less contagion during recent crises, however, as countries, investors, and the international financial institutions. An overview of the issues and the book, authorstijn claessens and kristin j. Jul 27, 2010 standard international business cycle models predict that greater financial integration should lead to lower synchronicity because of the opportunities to diversify risk, while models of contagion.
Todd smith this paper studies the extent to which basic principles of portfolio diversification explain contagious selling of financial assets when there are purely local shocks e. The goal of financial contagion theory was ultimately the elaboration of causes to explain patterns of disease occurrence. Understanding how it spreads rudiger dornbusch yung chul park stijn claessens much of the current debate on reforming the international financial architecture is aimed at reducing the risks of contagion best defined as a significant increase in crossmarket linkages after a shock to an individual country or group of countries. A decomposition of global linkages in financial markets over time. International financial contagion springer for research. Lessons and policy implications from the global financial crisis. An overview of the issues and the book 2001, joint with stijn claessens. A statistical procedure for testing financial contagion. A currency crisis in thailand quickly spread throughout east asia and then on to russia. Using firmlevel data to identify transmission channels stijn claessens, hui tong, and shangjin wei nber working paper no.
This dissertation examines contagion between international equity markets. The aim of the paper is to provide an analysis of contagion through the measurement of the risk premia disequilibria dynamics. By appointment course description this course will analyze the pros and cons of international financial liberalization, namely, the opening up to capital inflows and outflows on the part of developing and. Further thanks to the rapporteur, holger wolf, and conference participants for useful comments and suggestions. Conceptual and empirical issues, in international financial contagion by kristin forbes, roberto rigobon 2002 10 financial crises in emerging markets. A reassessment of the relationship between inequality and growth 2000. Without a doubt, financial market contagion is an issue of enormous interest in the finance literature. He worked for fourteen years at world bank beginning in 1987 until 2001 where he assumed various positions including that of lead economist. The case of mexico in international financial contagion ed. International financial contagion stijn claessens springer. The authors would like to thank stijn claessens, rudiger dombusch, and yung chul park for organizing the conference international financial contagion. Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and. Section iv presents evidence on the net effects of globalization.
Stijn claessens, giovanni dellariccia, deniz igan, and luc laeven. In such a world, the international financial system will need to change in order to offer better preventive and reactive policy measures to help avoid, or at least contain, financial crises. Pdf this paper attempts a synthesis of theoretical and empirical work on international financial contagion. An overview 37 as israel and chile, seemed to be much less vulnerable to this series of recent financial crises than other emerging markets, such as south africa.
As claessens and forbes have commented, before 1997 a lexisnexis search for contagion finds hundreds of examples in major newspapers, almost none of which refer to turmoil in international financial markets 2001, p. Brazil, mexico, russia, turkey, uruguay, and venezuela. Claessens, stijn, and kristin forbes, 2004, international financial contagion. Largescale synchrony, global interdependence and contagion. Stijn claessens born constantijn anton marie francois claessens, june 19, 1959 is a dutch economist who currently serves as the head of financial stability policy department of the bank for international settlements. Sachs, aaron tornell, andres velasco1996 financial market contagion in the asian crisis by baig and goldfajn1999 7. An overview of the issues and the book, introductory chapter of international financial contagion, edited by stijn claessens and kristin forbes, kluwer academic publishers, pp.
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