Debt and financial market contagion

We empirically investigate why financial crises spread from one country to another. For our analysis, we develop a new multiple-channel test of financial market contagion and construct indices of crisis severity in equity markets in order to examine how the transmission of shocks across countries ca...

Full description

Saved in:
Bibliographic Details
Published in:Empirical economics 2022-04, Vol.62 (4), p.1599-1648
Main Authors: Hsiao, Cody Yu-Ling, Morley, James
Format: Article
Language:English
Subjects:
Contagion
Debt
Econometrics
Economic crisis
Economic development
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
External debt
Finance
Financial market
Great Recession
Insurance
Lagrange multiplier
Management
Network analysis
Normal distribution
Pandemics
Random variables
Securities markets
Sovereign debt
Standard scores
Statistics for Business
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We empirically investigate why financial crises spread from one country to another. For our analysis, we develop a new multiple-channel test of financial market contagion and construct indices of crisis severity in equity markets in order to examine how the transmission of shocks across countries can be related to direct linkages between countries or to common characteristics. Based on network analysis with our proposed multiple-channel test for crises between 2007 and 2021, we find that the Great Recession is the most pervasive across countries, followed by the European sovereign debt crisis and the recent COVID pandemic, with the subprime mortgage crisis being the least pervasive. Our main finding is that similar public, private and external debt characteristics are particularly helpful in explaining the transmission of financial shocks during crises. Fiscal deficits appear more important than current account deficits, while stage of economic development matters more than regional linkages, but none of these indicators is as important as debt.
ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-021-02077-5