A Research On Contagion Of Subprime Crisis

From 2004 to 2006 the Federal Reserve raising interest rates 17 times leading to cool housing market, the subprime mortgage market problems emerged in March 2007, As the New Century Financial bankrupt, the sub-prime crisis finally broke out in the United States. The sub-prime crisis is also known as subordinated debt crisis in subprime mortgages which is originated in the United State, causing bond prices associated with subprime mortgages dropping and turned into a global economic crisis in the end. Many well-known International financial institutions lose huge fortune and some of then even bankrupt in the sub-prime crisis one after another. Crisis not only cause global stock and foreign exchange market fluctuate fiercely, bur also make the commodity prices high and high. And damage the entity's economic development ultimately. China, as an important part of the world economy, in the beginning of the crisis, didn't be influenced much due to strict control over capital markets, but the negative effects is more and more obvious as the crisis spread through the capital market, import and export trade channels and exchange rate transmission channel and so on. Although economic recovery policies have led to the world economy pick up gradually in the past two years, the crisis is still not over, and the next round of the crisis may break out at any time, so it is necessary to analyze financial crisis transmission channels and formulate relevant policies based on the results, so that our country can withstand the financial crisis more efficiency.This paper takes prime mortgage crisis transmission channels as an entry point, analyzing the contagion channel and measures which our government should be taken through empirical research.Firstly I describe the background and purpose of elaboration and overview the international transmission channels of financial crisis. The research on contagion of financial crisis is beginning from European currency in 1992. The early research is focused on whether contagion exists, with the in-depth study. Foreign scholars tended to make use of a empirical point to prove the existence of contagious. As the financial crisis has become increasingly frequent, the international research has been brought to the forefront. Our country mainly introduced the research results from abroad.The second part of the article focuses on the international contagious theoretical basis of sub-prime crisis. The World Bank defined the contagion as three categories:generalized contagion, strict and very strict contagion. The sub-prime crisis has much new features compared to the past financial crisis, including the diversity and complexity of transmission path, fast transmission speed and the wide range of transmission. The transmission channels of sub-prime crisis are, including transmission channels of trade, finance, exchange and.anticipation.In the third part, I make empirical analysis with capital data and the result shows that the sub-prime crisis infected other countries, particularly China. This paper employs an econometric test of the theory of smooth, co-integration tests, Granger causality test and impulse response function to test the international contagious of sub-prime crisis in view of the drawbacks of traditional testing methods.The fourth part mainly describes the contagion and enlightenment of sub-prime crisis on China. Onset of crises, the sub-prime crisis has less serious influence on China than on the European and other developed countries on the surface due to China's strict control on capital market. As the severity of the crisis deepened, the crisis began to affect China through a variety of channel. The influence can be divided into direct effects and indirect effects. Direct impact is contained by influenced on China's macro-economy, export trade, banking industry, foreign exchange reserves and the exchange rate. Indirect effects include the impact on China's stock and property markets. The sub-prime crisis has made serious repercussions on our country. However in the long run, the negative impact can give birth to new financial system, at the same time; we should take measure to respond to financial contagion. Firstly, government should intensify the macroeconomic regulation. Then, strengthen supervision of financial institutions. Third, change the mode of growth of export trade. Finally, establish a crisis early warning mechanism.In the last part, the article pointed out that it is a general trend that China will open capital market and China will face an even greater crisis and challenges in the future. Government must take early preventive measures to guarantee economics developing fast.