Micro-economic Characteristics Of Financial Contagion

In recent years there have been many financial crises, whether it is Asian Flu, Virus in Russia, or the Subprime crisis and the subsequent European debt crisis, are constantly shaken the core of the world’s financial system. More important is that the crises have rapidly spread to other countries, and made a huge impact to the global market. As a emerging economy, China also involved in these crises.This paper examines how the Subprime crisis and European debt crisis affected different types of firms from China. It constructs a new data set of financial statistics, industry information and stock returns for 346 companies in China. Based on the financial contagion theory, this paper uses the trading data of the Subprime crisis in 2008 and the European debt crisis in 2011 and selects 4 contagion channel proxies, namely product competitiveness, income effect, liquidity effect and credit crunch. Using the basic event-study methodology, this paper constructs a series of graphs showing preliminary evidence of how different types of companies were affected by the Subprime crisis and European debt crisis. In the comprehensive analysis, multivariate regression and quantile regression were used to investigate the effect of different contagion channels.The results indicate that:(1)Except stock liquidity, other three coefficients of contagion channel proxies are significantly negative in the Subprime crisis or European debt crisis, which indicates that product competitiveness, income effect and credit crunch are contagion channels.(2) The impact on firms in China varies across the Subprime crisis or European debt crisis, this indicates that how each crisis spreads should be highly dependent on the specific characteristics of the country where the crisis originates.This paper research financial contagion channel from the micro-level. Not only reveals how did the Subprime crisis and European debt crisis affect Chinese firms with different characteristic, it also shows that firm-level analysis can be a useful complement to the more traditional macroeconomic approach in understanding important international relationships.