Financial Crisis Propagation In International Trade Network

Since the 1990s, international financial crisis has occurred more and more frequently and violently, and it spreads more quickly than ever before. This phenomenon has attracted great attention of economists. Up to the present, the perspective that financial crisis, like epidemic diseases, will spread more quickly and violently along with the development of world economic and financial integration has reached a consensus worldwide. The recent international financial crisis "subprime crisis" originated from the U.S. in 2007 has caused operational difficulties or even bankruptcy in many worldwide financial institutions. It also results in the international payment crisis and credit rating downgrade in many countries and triggers the most serious international economic recession since the Great Depression. Up to September 2011, its effect is still breeding and infesting. It is said that the second-round propagation of the financial crisis may already occurred. Not only the US and European countries are seriously affected, but also many other countries like India, Korea, Japan and even China suffer as well to some extent.In order to prevent the financial crisis from spreading out like a plague worldwide and build a firewall to block financial propagation, it is urgent for the economists to make more in-depth studies on the reason, influence factors, channels and mechanisms of the propagations and their evolution patterns. The study of the characteristics of the recent crisis and its prevention mechanism or immunization strategies is also need.From the propagation channel perspective, cross-border transmission of financial crisis mainly occurs through three channels, i.e. trade network among countries, financial market linkages and pure propagation (e.g. learning effect of investors, herding, etc.), resulting in three consequences, i.e. the financial crisis cross-border propagation among financial institutions in different countries, financial crisis spreading out from financial institutions to the real economy and financial crisis cross-border spread within the real economies. The rapid development of world economic integration has made international trade relationship among countries become more and more close and tight. Increasing close connections between countries through trade network also makes it a very important channel of financial crisis propagation from financial institutions to the real economy and within the real economies. It is of very importance to study the effects of cross-border financial crisis propagation via international trade network and its influence factors, which may be useful to remind those countries who will actively participate in the international trade in the future of the possible financial spread risks that may occur and taking effective measures to prevent the crisis propagation from heavy damage to their domestic economies on its early stage.This paper finds out through its literature review of the research on cross-border financial crisis propagation that a consensus has already been reached in the existing qualitative researches as of the definition of financial propagation, spread channel, propagation mechanism, etc. While existing quantitative analyses about the evolution of the financial propagation process, propagation effects and so on mainly rely on establishing econometric models, with the micro-entity in the international economic network—each individual country—being investigated individually as of the degree and extent of financial crisis spread. Such results can only explain the consequences of the financial propagation for each individual country, leaving the puzzles such as "by what media can the financial crisis spread out to each individual country and what does the process consist of" untouched. Such one-sidedness can neither provides every country with in-depth information about the intensity of the financial crisis propagation to it nor gives strong support basis to preventive measures each country might take correspondingly.Complex network theory is considered one of the most important disciplines in the 21st century. From its beginning onward, complex network theory has witnessed its theoretical and applied research applications springing up in the natural sciences, engineering, biological and social analysis explosively and vigorously. In recent years, a large number of articles on complex networks appear in Science, Nature and other leading international journals, which is another example reflecting that the complex network theory and applications has become an emerging research focus. In this paper, the effects of cross-spread of the financial crisis via international trade channels have been investigated using complex network theory, taking the international trade relationship as a complex network of trade contacts, applying complex network theory to the study of economic and trade networks, providing a macro, comprehensive, complete, rigorous and scientific research perspective to the study of financial propagation phenomenon. As a result, not only the effects of cross-border financial crisis horizontal spread can be more fully revealed, overall network propagation power of the financial crisis towards every individual country be tested, and the dynamic evolution of the financial propagation process be simulated, but also the optimum time for jointly intervention by the governments and immunization strategies for each country can be provided, a solid theoretical basis concerning a firewall establishment be built up. Hence, a very important theoretical research method and perspective has been borrowed in this thesis to apply the complex network theory to the study of financial propagation.Several achievements have mainly been done in the thesis:1. By thoroughly reviewing the financial propagation literatures, there are about three perspectives: First, the qualitative analysis of definition of financial crisis propagation, the source of propagation, propagation channel, the characteristics of the previous financial propagation and financial crisis prevention policies and measures, laws and regulations and other issues; Second, the quantitative measure of the financial propagation effect for a single country. These researches are empirical analyses mostly through the establishment of statistical models or econometric models; Third, new researches of financial propagation emerge based on new theories or from a new perspective. The number of study in this branch of researches is currently still relatively small. The perspective focus is fragmented with only a few studies on the complex network research of financial crisis, which consists of mainly empirical or analogical studies of banking crisis in the inter-bank market using network theory. There are few empirical researches on the financial crisis propagation via international trade or international market networks using complex network theory.2. Based on financial propagation theory and its application in the qualitative analysis of the propagation mechanism and influence factors for the financial crisis via international trade network, this these has built a theoretical model for the analysis of horizontal cross-border financial crisis propagation, i.e. a regression model with network propagation effect in it. It also has established a dynamic evolution model that can better describe the process of financial crisis propagation with the help of SIS model borrowed from epidemiology.3. Also based on complex network theory and research methods, the thesis has finished an empirical analysis on the statistic essence and structure of the international trade network by building up the world's leading international trade network in accordance with certain rules of network theory. The paper finds out that the node degree and its weight distribution in the international trade network are subject to power-law distributions, having the characteristics of scale-free networks; It also finds that international trade network has the characteristics of a small-world and a clear community structure. It also concludes from two-layer international trade networks analysis of the United States, European Union, China, Japan and Russia that the five countries are the trade centers in the international trade network.4. The thesis's empirical analysis of the cross-border propagation effect of the recent global financial crisis via international trade network using horizontal propagation model comes out the propagation coefficient for each country, describing quantitatively the propagation effect for those countries who have suffered from serious attack due to their trade ties with those affected countries. Corresponding preventive countermeasures thus provided.5. It also argues, through the network simulation, that the statistical characteristics of the network play an important role in the propagation effect of financial crisis. 6. From the overall perspective of the international trade network, the thesis analysis the possibility of the world as a whole to intervene the financial crisis and immune itself from financial crisis propagation in the international trade network. It gives out several suggestions for China to improve her preventive measures, laws and regulations.The main innovation points are as follows:1. Apart from the previous researches that combine the total effects of the transmission of financial crisis throughout all kinds of channels together, this paper will focus on the study of its transmission via international trade network about the effect and law of transmission. This is a brand new research area.2. This paper has also provided a new research perspective and method for the followers based upon the complex network theory to study the financial crisis propagation, contracting to the former "point to point" transmission studies.3. The analytical model established in the paper for the studying of cross-broader transmission effect of the financial crisis via international trade network, i.e. the network regression model, innovated to some extends in its modeling. Its independents consist of network transmission variables and self-influenced country-specific variables.