August 05, 2010
For a while, contagion had dropped off the (research) map. But it's now back (thanks to Greece et al!), in both research and policy arenas. A new symposium published in Pacific Economic Review covers the topic.
Here's the symposium:
SPECIAL SECTION: ON CONTAGION
- INTRODUCTION TO THE SPECIAL ISSUE OF PACIFIC ECONOMIC REVIEW ON CONTAGION (p 336-339), by Bertrand Candelon
- CROSS-COUNTRY CAUSES AND CONSEQUENCES OF THE 2008 CRISIS: INTERNATIONAL LINKAGES AND AMERICAN EXPOSURE (p 340-363), by
Andrew K. Rose, Mark M. Spiegel
Abstract: We model the causes of the 2008 financial crisis together with its manifestations, using a cross-country multiple indicator multiple cause model. We consider both national and, critically, international linkages between countries and potential crisis 'epicentres', including the United States. A country holding an epicentre's securities is exposed through a financial channel, while a country that exports to that epicentre is exposed through a real channel. We are unable to find strong evidence that international linkages can be associated with crisis incidence. In particular, exposure to the United States in either form has little impact. If anything, it appears to help.
- TESTING FOR ASSET MARKET LINKAGES: A NEW APPROACH BASED ON TIME-VARYING COPULAS (p 364-384), by
Hans Manner, Bertrand Candelon
Abstract: This paper proposes a new approach based on time-varying copulas to test for the presence of increases in stock market interdependence (also known as shift contagion) after a financial crisis. We discuss the importance of considering simultaneously separate breaks in volatility and dependence. Without such consideration, the contagion test turns out to be biased. A sequential algorithm is proposed to tackle this problem. Applied to the recent 1997 Asian crisis, the analysis confirms that breaks in variances always precede those in the dependence parameter. Moreover, a significant 'J-shape' evolution of the dependence parameter is detected, supporting the idea of shift contagion.
- COMOVEMENTS OF DIFFERENT ASSET CLASSES DURING MARKET STRESS (p 385-400), by
Jan Piplack, Stefan Straetmans
Abstract: This paper measures US financial asset class linkages (stocks, bonds, T-bills and gold) during crisis periods. We use extreme value analysis to assess the bivariate exposure of one asset class to extreme movements in the other asset classes. These bivariate co-crash probabilities can be interpreted as a measure of financial contagion. Statistical testing reveals that bivariate extreme linkage estimates exhibit time variation for certain asset pairs, possibly caused by exogenous factors like oil shocks or shifts in monetary policy. Our results have potentially important implications for long-run strategic asset allocation and pension fund management.
- DETECTING SHIFT AND PURE CONTAGION IN EAST ASIAN EQUITY MARKETS: A UNIFIED APPROACH (p 401-421), by Thomas J. Flavin, Ekaterini Panopoulou
Abstract: We test for contagion between pairs of East Asian equity markets over the period 1990–2007. We develop an econometric methodology that allows us to test for both 'shift' and 'pure' contagion within a unified framework. Using both Hong Kong and Thailand as potential shock sources, we find strong evidence of both types of contagion. Therefore, during episodes of high volatility, equity returns are influenced by changes in the transmission of common shocks and additionally by the diffusion of idiosyncratic shocks through linkages that do not exist during normal times.
CONTAGIOUS POLICIES: AN ANALYSIS OF SPATIAL INTERACTIONS AMONG COUNTRIES' CAPITAL ACCOUNT POLICIES (p 422-445), by Andreas Steiner
Abstract: Countries' capital account policies might be contagious in the sense that domestic policies are driven by other countries' policies. A model of strategic interactions is developed to show that countries' best response to policy changes elsewhere consists in imitating this policy. Using a spatial econometric model, the hypothesis of policy interactions is tested in a large panel data set. The evidence shows that capital account policies are contemporaneously correlated across countries. Concerning fundamentals, the move to a fixed exchange rate regime and an increase in real world interest rates are correlated with the imposition of capital account restrictions.
I would be remiss if I didn't mention the following article, by two co-authors of mine, which is in the issue but not in the symposium:
REAL EXCHANGE RATE, MERCANTILISM AND THE LEARNING BY DOING EXTERNALITY (p 324-335), by Joshua Aizenman, Jaewoo Lee
Abstract: This paper examines the degree to which the learning by doing (LBD) externality calls for an undervalued exchange rate. We obtain mixed results. For an economy where the LBD externality operates in the traded sector, real exchange rate undervaluation may be used to internalize this externality, if the LBD calls for subsidizing employment in the traded sector. If the LBD externality is embodied in aggregate investment, the optimal policy calls for subsidizing the cost of capital in the traded sector, and there is no room for undervalued exchange rate policy.
Posted by Menzie Chinn at August 5, 2010 04:34 PMdigg this | reddit
My head hurts.
There's another less obvious contagion of sorts. During the 90s and 00s a big part of the GDP growth in the US and especially in Britain was in the financial services sector. After all of the dust has settled the realization will dawn on folks that the world isn't big enough to have two financial centers. New York or London, but not both. If New York remains the financial center of the world, then the Brits better give up their new found appreciation for fine dining and the high life. Welcome back to boiled mutton and mushy peas.
Posted by: 2slugbaits at August 5, 2010 05:54 PM
Sorry Menzie, OT, but... Uh Oh! Are the wheels coming off? Romer has announced her resignation. One source: http://politicalticker.blogs.cnn.com/2010/08/05/romer-resigns-white-house-post/
Posted by: CoRev at August 5, 2010 06:18 PM
2slugbaits: If a smaller financial sector is in the cards, worldwide, then I think that fine dining might take a hit in both places. Currently London is bigger, so not sure that NYC will now take the lead -- but can't say I've studied this too much to have a strong view.
CoRev: No, I doubt it.
Posted by: Menzie Chinn at August 5, 2010 07:50 PM
Courtesy of Ft alphaville reading recommendation may I suggest to add to the list:
NBER Working paper Econometric measures of systemic in the finance sector and insurance sectors
A neurone stimulation where the insurance and banking sectors are pint pointed to be at the core center of the systemic risks. A conclusion calling for a Monte Carlo simulation without Nicolas and Daniel Bernoulli in support.The above study leaves questions as to the representativity of its tested samples ?
OOCC quaterly derivatives report (P13..)
As for London,there is a prevalent conclusion that eating well on a budget, would require to make 3 breakfasts a day.
To be read:
The evolution of the US financial industry from 1860 to 2007 Thomas Philippon
To be assessed:
BIS statistics from P9 and after. It is blatant that the UK does not need to borrow so much money for catering to its domestic economy needs (to a lesser extent it is the same for many European countries)
An external debt of 9.123 trillion usd mostly consumed by its banking business
Not to forget BIS Forex statistics.
Should children be the future of the humankind, they may as well set the guidelines for the banking industry.
India banks run by street kids
Posted by: ppcm at August 5, 2010 10:59 PM
Good for Romer. Get out with some dignity while Summers, a buffoon of Krugmanesque proportion, drives the country off a cliff.
Volcker would be wise to do the same.
Posted by: W.C. Varones at August 6, 2010 07:19 AM
If California runs out of money, it may provide an interesting data point for this research. And it may even raise some questions about the national solvency. This habit of looking to bond prices to disparage the notion of 'bond vigilantes' seems to me akin to looking stock prices of homebuilders in 2006 to disparage the notion of a housing bubble. Mr. Market has shown a tendency for dramatic errors of late.
Posted by: don at August 7, 2010 01:42 PM