The source of financial contagion and spillovers: An evaluation of the covid-19 pandemic and the global financial crisis

This study investigates the reaction of stock markets to the Covid-19 pandemic and the Global Financial Crisis of 2008 (GFC) and compares their influence in terms of risk exposures. The empirical investigation is conducted using the modified ICSS test, DCC-GARCH, and Diebold-Yilmaz connectedness analysis to examine financial contagion and volatility spillovers. To further reveal the impact of these two crises, the statistical features of tranquil and crisis periods under different time intervals are also compared. The test results show that although the outbreak’s origin was in China, the US stock market is the source of financial contagion and volatility spillovers during the pandemic, just as it was during the GFC. The propagation of shocks is considerably higher between developed economies compared to emerging markets. Additionally, the results show that the COVID-19 pandemic induced a more severe contagious effect and risk transmission than the GFC. The study provides an extensive examination of the COVID-19 pandemic and the GFC in terms of financial contagion and volatility spillovers. The results suggest the presence of strong co-movements of world stock markets with the US equity market, especially in periods of financial turmoil.

Market Openness and Its Relationship to Connecting Markets Due to COVID-19

In this research, statistical models were formulated to study the effect of the health crisis arising from COVID-19 in economic markets. Economic markets experience economic crises irrespective of effects corresponding to financial contagion. This investigation was based on a mixed linear regression model that contains both fixed and random effects for the estimation of parameters and a mixed linear regression model corresponding to the generalisation of a linear model using the incorporation of random deviations and used data on the evolution of the international trade of a group of 42 countries, in order to quantify the effect that COVID-19 has had on their trade relationships and considering the average state of trade relationships before the global pandemic was declared and its subsequent effects. To measure, quantify and model the effect of COVID-19 on trade relationships, three main indicators were used: imports, exports and the sum of imports and exports, using six model specifications for the variation in foreign trade as response variables. The results suggest that trade openness, measured through the trade variable, should be modelled with a mixed model, while imports and exports can be modelled with an ordinary linear regression model. The trade relationship between countries with greater economic openness (using imports and exports as a trade variable) has a higher correlation with the country’s health index and its effect on the financial market through its main trading index; the same is true for country risk. However, regarding the association with OECD membership, the relations are only with imports.

Financial Contagion Patterns in Individual Economic Sectors. The Day-of-the-Week Effect from the Polish, Russian and Romanian Markets

This paper studies the presence of the day-of-the-week (DOW) effect in the financial contagion process observed on individual economic sectors from the Post-Communist East European markets. The only markets that provide national-specific sector indices determined throughout the 2008 financial crisis are Poland, Romania and Russia. The novel methodology combines two existing perspectives from financial literature, by employing a GJR-GARCH framework on a dummy regression model that accounts for both the crisis period and the weekdays. All indices show the presence of the DOW effect during the crisis and/or non-crisis periods, thus signaling their low level of market efficiency. However, the contagion process affects only eight of these indices: the banking, IT and oil and gas sectors from Poland, the chemical, telecommunication and transport sectors from Russia and energy sectors from Russia and Romania. All of them show signs of the DOW effect in contagion: five exhibit higher spillovers on crisis Mondays, while the other three show other weekday patterns. The findings suggest that the DOW effect is not specific to certain countries or certain economic sectors.

Modeling and Simulating Cross Country Banking Contagion Risks

The recent financial crisis proved that financial contagion could spread among countries resulting in disruptive effects. In this paper, by modeling and simulating banking system behavior and linkages across countries, we assess, based on data from the BIS and IMF, the possible outcome of domestic crises and how contagion spreads over countries. Results allow detailing the role of a “lighter” or of a “fueler” of financial crises for each country and assessing how each country can affect each other country by contagion, signaling the importance of financial interdependence between some neighboring countries, and detailing which counterpart country would be affected by the ring-fencing of each considered country’s banking system. The method also allows for what-if analyses to optimize the risk exposures, and to plan an emergency strategy in case of alarms coming from specific countries.