Testing Methods And Co-movement Analysis For Financial Crisis Contagion

In the context of the development of financial globalization,economies of different organizations and different regions form the close financial network through mutually holding assets,the degree of interdependence among financial markets is growing.The formation of such financial networks has promoted global financial development,and also provides the potential channels to spread the financial crisis.Since the 90s of twentieth Century,for example,the Asian financial crisis,the U.S.subprime mortgage crisis and the European debt crisis,all these risks of the financial system broke out one after another,especially the effects of subprime mortgage crisis and the European debt crisis are more far-reaching,because of their wide spread and destruction,the global financial system is still not completely out of the shadows so far.The investor's confidence has been hit by the slump of the global economy,and the volatility of the financial markets has been increased.We can see that the negative shock of the crisis is far more than expected.Just because of the interdependence among global economies,the impact of the financial crisis on the economy is easy to be spread.It can be argued that this diffusion is a contagious effect of the crisis,we call it financial contagion.There is no doubt that the large-scale cross-border financial risk is very harmful.Therefore,it is very important to study the existence of financial crisis and the contagion mechanism from different angles.Generally speaking,the financial crisis is usually denoted as a significant increase of the correlation between financial markets during the crisis.It can also be understood as a response to the financial risk spillover of a market,an irrational domino effect occures to other related markets,and ultimately leads to the systemic risk.In modern financial market,a variety of new financial derivatives emerge in endlessly,the financial risks become more complex,and the correlation between financial markets is often not a simple linear relationship,but has a nonlinear nature.The existing methods that used to test financial contagion still have some lack in the study,in view of this,we need to construct a new model and a new measuring method to study the existence of the contagion of financial crisis and for contagion mechanism.In this paper,we summarize the definitions and the formation mechanism of financial contagion,and then we summarize the diffusion mechanism and the cause of formation of financial crisis.Then we summarize the current analysis of the financial crisis of the common test methods,and analysis the blank that existing test methods have not yet taken into account.We think the truth of the financial contagion is the risk spillover and diffusion,then we use the markov switching mechanism of quantile regression model and the complex network methods,from the angle of financial risk under the condition and the angle of comovements changes in the intensity of the complex network respectively,to analyse the financial contagion in the America's subprime mortgage crisis and the European debt crisis.In order to analyse the contagion mechanism of financial crisis,we first propose a markov switching quantile regression model and estimate the model parameters by maximum likelihood estimation.We first conduct a simulation of the regression model,the simulation results show that the maximum likelihood estimation method is effective for the estimation of model parameters.Then we conduct the empirical study of the regression model,from the angle of the financial crisis of American subprime mortgage crisis.We study the spread of the financial crisis from the United States to the Europe's two major financial markets in France and Germany,to detect the financial contagion.Then we use the quantile regression coefficients to measure the level of financial contagion.The empirical results show that the interdependence between the United States and EU countries shows a significant increase in the state of crisis.Then we also use the complex network method to study the financial crisis contagion mechanism from the perspective of markets comovements.In order to study the financial contagion from United States to the other countries during the subprime crisis,we selected three of the world's major stock market--China,Japan and German stock market index,to analise the comovement behavior between these three indices and the S&P 500 index.In this paper,we define the comovement as a coarse graining process,and we give the transformation characteristics to the complex network model and the evolution model in the model transformation.In order to analyse the contagion of the subprime crisis,we divide the data into three segments.The empirical result shows that the co-movement modes of the S&P 500 index and the stock indexes of other countries are clustered around a fewcriticalmodes during the evolution.The co-movementmodes have the characteristic of grouping,and the conversion of the co-movementmodes requires an average of 3-5 days.This paper confirms the sub-prime crisis contagion behavior by comparing the parameters including degree,clustering coefficient and betweenness centrality in three stages.This researchmay provide further information between S&P 500 index and other stock indexes for the co-movement.More importantly,a new approach is provided for testing the financial contagion effect in this paper.