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The 2007 - 2009 financial crisis shows the importance of financial shocks and financial market integration as a transmission mechanism between countries. My dissertation investigates spillover effects in the integrated financial market. The first two chapters find that transmission of financial shocks can differ dramatically depending on the type of financial market integration, in particular, on the distinction between integration in the short-term debt versus long-term debt markets. The third chapter examines the domino effects of spillovers in the global banking system. The first chapter investigates the role of different types of financial integration in transmitting a country-specific financial shock. I develop a two-country DSGE model in which the financial market is divided into the short-term debt and long-term debt markets. The dominant effect differs in the short-term debt and long-term debt market in the presence of the financial shock. The financial accelerator operating in the short-term debt market leads to a negative spillover, while efficient allocation of investment working through the long-term debt market leads to a positive spillover. The second chapter shows the empirical evidence that supports the theoretical result of the first chapter. Empirical estimates show that short-term debt market integration is associated with a negative spillover effect on output in other countries, whereas long-term debt market integration is associated with a positive spillover effect on foreign output in the presence of negative financial shocks. This result explains the ambiguous result of past empirical studies that did not distinguish between different types of assets. The third chapter suggests the vulnerability index of 20 countries constructed by a network analysis. This index shows how vulnerable each banking system is with respect to a country-specific financial shock in the global banking system. The vulnerability index in most of the countries in the dataset has declined over the past five years, and this has real effects on output. During boom periods, the vulnerability index is associated with significant positive GDP growth surprises. During crisis times, the vulnerability index is associated with significant negative GDP growth surprises.
The contents in this volume are based on the program Sets and Computations that was held at the Institute for Mathematical Sciences, National University of Singapore from 30 March until 30 April 2015. This special collection reports on important and recen
The objective of this handbook is to provide the readers with insights about current dynamics and future potential transformations of global financial markets. We intend to focus on four main areas: Dynamics of Financial Markets; Financial Uncertainty and Volatility; Market Linkages and Spillover Effects; and Extreme Events and Financial Transformations and address the following critical issues, but not limited to: market integration and its implications; crisis risk assessment and contagion effects; financial uncertainty and volatility; role of emerging financial markets in the global economy; role of complex dynamics of economic and financial systems; market linkages, asset valuation and risk management; exchange rate volatility and firm-level exposure; financial effects of economic, political and social risks; link between financial development and economic growth; country risks; and sovereign debt markets.
This book studies the information spillover among financial markets and explores the intraday effect and ACD models with high frequency data. This book also contributes theoretically by providing a new statistical methodology with comparative advantages for analyzing comovements between two time series. It explores this new method by testing the information spillover between the Chinese stock market and the international market, futures market and spot market. Using the high frequency data, this book investigates the intraday effect and examines which type of ACD model is particularly suited in capturing financial duration dynamics. The book will be of invaluable use to scholars and graduate students interested in comovements among different financial markets and financial market microstructure and to investors and regulation departments looking to improve their risk management.
The recent financial crisis raises important issues about the transmission of financial shocks across borders. In this paper, a global vector autoregressive (GVAR) model is constructed to assess the relevance of international spillovers following a historical slowdown in U.S. equity prices. The GVAR model contains 27 country-specific models, including the United States, 17 European advanced economies, and 9 European emerging economies. Each country model is linked to the others by a set of country-specific foreign variables, computed using bilateral bank lending exposures. Results reveal considerable comovements of equity prices across mature financial markets. However, the effects on credit growth are found to be country-specific. Evidence indicates that asset prices are the main channel through which-in the short run-financial shocks are transmitted internationally, while the contribution of other variables-like the cost and quantity of credit-becomes more important over longer horizons.
This paper uses a dynamic economy model, with unionized labor markets, to analyze the effects of labor market reforms, similar to those recently introduced in Germany, on the domestic and trading partner economies. The model is calibrated on Germany and the rest of the Euro area. The results indicate that German labor market reforms have positive spillover effects on the rest of the Euro area, which operate through the channel of trade, relative price adjustment, and financial market integration. Compared to a competitive labor market, setting, unionization dampens the positive response of the domestic economy and magnifies the spillover effects.
Although China’s much-needed transition to a new growth path is proceeding broadly as expected, the transition is still fraught with uncertainty, including regarding the Chinese authorities’ ability to achieve a smooth rebalancing of growth and the extent of the attendant slowdown in activity. Thus, in the short run, the transition process is likely to entail significant spillovers through trade and commodities, and possibly financial channels. This note sheds some light on the size and nature of financial spillovers from China by looking at the impact of developments in China on global financial markets, with a particular emphasis on differentiation across asset classes and markets. The note shows that economic and financial developments in China have a significant impact on global financial markets, but these effects reflect primarily the central role the country plays in goods trade and commodity markets, rather than China’s financial integration in global markets and the direct financial linkages it has with other countries.
This thesis consists of three essays. The first essay (chapter 2) examines the correlations between bond markets, stock markets and currency forwards during the quantitative easing (QE) programs launched by the U.S. Federal Reserve. Using DCC-GARCH models, we document a spillover impact of QE on the international financial markets and find that these correlations differ by QE period across developed and emerging countries. Our findings provide new insights into the impact of unconventional monetary policy regimes on the relationships between various international financial asset markets. The second essay (chapter 3) examines the effectiveness and performance (E&P) of hedging international portfolios of bonds from developed and emerging countries. The excess returns and the variances of these portfolios are significantly lower during the QE versus pre-QE period. During the QE period, excess return and variance sensitivities are positive and negative with the Fed's MBS holdings and become less positive and less negative with the Fed's holdings of Treasuries. Hedging E&P during the QEs depend on the chosen hedging strategy and level of economic development. Results are robust using other hedging E&P measures and excluding countries with their own QEs. The third essay (chapter 4) finds that the integration of international bond and stock markets in 31 countries are affected significantly by U.S. quantitative easing (QE). After conceptually linking variations in the QE effects on bond and stock market integration to six transmission channels, we find that the actual effects depend upon the Fed holdings (MBS or Treasuries), channel considered, asset type (bond or stock), and the economic development categorization of the countries (developed or emerging). Cross-border banking flows as our proxy for the risk-taking channel significantly increase bond and stock market integration during each QE period for both developed and emerging countries.