A Research On The Global Contagion Effect Of Financial Crisis

With the accelerated process of economic globalization and financialliberalization, the financial crisis breaks out in one country would not only havenegative influence on its domestic economies but may also be spread to other areas orother countries through various channels and paths. Other types of financial crisismay be triggered by the contagion of financial crisis. For example, financial crisis inIceland as well as European sovereign debt crisis in Greece and other Europeancountries to a certain degree are somewhat subject to the financial crisis in the UnitedStates. Under this background, the researches on the contagion of financial crisis haveimportant theoretical and practical significance.Financial contagion is be defined as a significant increase in cross-marketlinkages after a shock to one country (or group of countries). In the increasinglyglobalized economy and finance, financial risks become more and more complex anddiverse, meanwhile the financial time series and the linkages between financialmarkets show properties like nonlinear, asymmetric, tail dependent and withdynamics of dependence structures. Since the linear correlation coefficient can onlymeasure the linear relationship between two variables with the hypothesis of normaldistribution, and the Granger causality test can’t measure the correlation between twovariables quantitatively. So these measure methods are no longer suitable to measurethe market correlations. In such cases, the copula model can separate the univariatemarginal distribution functions and a copula function which reflect the dependencestructure without specific the margin distributions of variables. For more important,the copula could capture the information of nonlinear, asymmetric dependencestructure and asymptotic tail dependence. Therefore, copulas have many propertiesthat are very useful in the study of dependence which is the greatest importance in thestudy of financial contagion. Furthermore, dynamic copula models meet the needs ofthe dynamic development of the markets, so they would be a good method to analyzemarket dependence and do the researches on the contagion of financial crisis.Based on previous researches, this article puts forward a balance sheet framework to study the path and mechanism of domestic and international contagionof macro financial risks. With the analysis on the characteristics of the economy’seconomic and financial development and changes of the global financial crisis, thisarticle does the researches on the contagion effect of American financial crisis to thewhole market, financial sector and industrial sector of totally21countries in Asia,Europe and the Americas based on dynamic copulas. In addition, it assesses theexistence of contagion and compares the intensity of contagion between countries andbetween financial and industrial sector. This is a systematic and comprehensive studyon contagion of financial crisis from worldwide perspective. This research usesqualitative and quantitative analysis along with static and dynamic studies, therefore,it would provide more comprehensive appraisal of the impact of the financial crisisand its contagion effect.The content of this article is arranged as follows:Chapter1is the part of literatures review. The major emphasis of this review isfinancial contagion and the implication of copula method in the contagion of financialcrisis.Chapter2studies on the path and mechanism of financial crisis contagion. Itintroduces a new way to analyze international financial contagion which is based onmacro balance sheet approach, and analyzes the path and mechanism of domestic andinternational financial contagion. In this part, it also does the researches on thecontagion mechanism of the U.S. subprime mortgage crisis to China.Chapter3is the introduction of Copula theory including the definition, propertiesand the main types of copula, the dependence structure and tail dependence betweenvariables, parameter estimation methods and the evaluation methods on the goodnessof fit.Chapter4does the empirical researches on global contagion effect of financialcrisis based on copula theory. In this chapter, the article uses dynamic copula modelwith structure changing and time-varying models to do the researches on the changesof dependence structure between markets as well as the contagion effect of Americanfinancial crisis to the whole market, financial sector and industrial sector of totally21 countries in Asia, Europe and the Americas. Then, it assesses the existence ofcontagion. It has four steps to do these empirical researches which include descriptivestatistical analysis, choosing the marginal distribution of copula model, constructingthe optimal copula model and the analysis of markets dependence structure and theexistence of contagion test.Chapter5compares the intensity of global contagion of financial crisis. Thischapter compares the intensity of financial crisis contagion between cross-regionalcountries in Asia, Europe and the Americas, and compares the intensity of financialcrisis contagion between the countries within the region as well as between thefinancial sector and industrial sector within in a country.Chapter6presents the summary and outlook. This chapter conducts acomprehensive summary of the work of this article which summarizes the researchresults and the main conclusions of this article and finally outlooks the furtherresearches.