Investigating the dynamics of crisis transmission channels: A comparative analysis

• Published in: Journal of international money and finance 2023-07, Vol.135, p.102857, Article 102857
• Main Authors: Yuan, Ying, Wang, Haiying, Wang, Tianyang
• Format: Article
• Language: English
• Subjects: Financial contagion channel; Portfolio rebalancing; Wealth effect
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2023.102857

•We analyze the complexity of cross-market interdependence during financial crises.•We examine crisis transmission channels through a comparison of three major crises.•Major contagion channels for upper-tail and lower-tail are different.•We also shed light on underlying dynamic mechanisms for financial contagion. This paper analyzes the growing complexity of cross-market interdependence during financial crises. From macroeconomic, investor constraint, and quantitative easing policy perspectives, we investigate crisis transmission channels across major stock markets by comparing the 2008 global financial crisis, the 2020 COVID-19 crisis, and the 2022 Russo-Ukrainian crisis. We find that lower-tail contagion is mainly driven by the wealth effect and upper-tail contagion is mainly driven by the portfolio rebalancing, and shed light on the underlying dynamic mechanisms, such as credit spreads, risk aversion, economic policy uncertainty, and quantitative easing policy. Additionally, we show the impact of macroeconomic fundamentals, investor sentiment, and quantitative easing policy on lower-tail and upper-tail financial contagion.