Theoretical And Empirical Study On Contagion In Globalization Environment

Expectation contagion mechanism in financial crises, which can not be explained byfundamental linkage between economies, is called/pure contagion effect0in the aca-demic world. This contagion effect can spread within world range, and emerging marketswere always infected as the worst-hit areas. When expectation contagion mechanism exits,a lots of transmission channels come into play, which makes the contagion effect morecomplicated to be detected and analyzed. Using a novel framework, our thesis system-atically analyzes the contagion effect from U.S. market to Asian emerging markets andfinds a typical/domino effect0which has not been aroused with enough recognition.This domino effect plays an important role in the work of multiple equilibria,and final-ly lends to the/self-fulfilling0contagion effect among emerging markets. This findingcan be used to improve the policymaking of Financial Supervisory Authority, especially indetecting!distingushing and cutting off different transmission channels.The novel framework constructed in this thesis includes/one-dimensional analy-sis0!/three-dimensional analysis0and/multi-dimensional analysis0. The informationfrom monetary markets!foreign exchange markets!capital markets and bond markets arealso involved in the framework, which can be used to characterize the complexity and non-linearity in contagion effect, and distinguish the process!strength and direction of/purecontagion0./One-dimensional analysis0focuses on the probability of the occurrence of con-tagion to a particular market. By analyzing the data from monetary markets!foreignexchange markets and bond markets, we can measure the influence of this existing in-formation on the probability of occurrence of contagion, and the marginal effect whenthe existing information changes. Therefore,/one-dimensional analysis0is designed todetect the endogenous factor behind contagion effect, which can be used to improve the early-warning system./Three-dimensional analysis0focuses on how financial crises originated in U.S.market transfer to a particular market. Using Bayesian network model, we can characterizethe domino effect and/intermedia0, so as to distinguish the process!strength anddirection of/pure contagion0. The analysis on domino effect, in fact, emphasizes theimportant role of the/intermedia0in amplifying the crisis, and the fatality in the collapseof the whole system. Therefore,/three-dimensional analysis0can effectively detect andweight the transmission channels in contagion effect, so as to give theoretical support tothe short-term isolation policy./Multi-dimensional analysis0puts the crisis market and all the infected marketsinvolved in a framework, estimating the effect of policy coordination of all the infectedmarkets. By the technologies of Permanent-Transitory decomposition and price discoverymeasurement, we can estimate the efficiency of contemporaneous information transmissionand measure the long-term influence of disharmonious policies when economies deal withthe contagion. Therefore,/multi-dimensional analysis0can effectively measure long-term and short-term effects of policies of economies, providing theoretical support to theregional monetary cooperation and regional information sharing.Based on our novel framework, we have some relevant and significant findings as fol-lows. There is contagion effect from U.S. market to Asian emerging markets, and thereexists a typical transmission channel–domino effect with Japan and Hong Kong markets asthe intermedia; the direct contagion effect from U.S. market to emerging markets is limited,while the domino effect transmitted by Japan and Hong Kong markets plays the main rolein contagion. The existing information from monetary markets!foreign exchange mar-kets and bond market, is important in the formation of contagion. Meanwhile, investorswill give a new explanation of the existing information when crisis happens, which fur-thermore has a marginal effect on the occurrence of contagion. Therefore, contagion isa dynamic evolution process motivated by monetary markets!foreign exchange market! bond market and capital markets, implying the difficulty in crisis management. The globalfinancial markets form a liquidity crossover network, and a slight move in one market mayaffect the situation as a whole domino. The crisis management of Financial SupervisoryAuthority should not only take into consideration the exogenousness of contagion, but alsothe endogenousness of contagion.