Contagion: Why Crises Spread and How This Can Be Stopped

Claessens, Stijn; Dornbusch, Rüdiger; Park, Yung Chul

doi:10.1007/978-1-4757-3314-3_2

Cited by 128 publications

(82 citation statements)

References 11 publications

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“…They have been qualified as due to exogenous shocks because of the abscence of any LPPS in the time series preceding them, implying that these markets did not crash by an instability associated with a developing bubble. These two phenomena are reminiscent of the contagion literature (see [Claessens et al (2001), Forbes and Rigobon (2002), for reviews), which refer to manifestations of propagating crises resulting from an increase in the correlation (or linkage) across markets during turmoil periods. Our present analysis suggest new avenues for research to establish the role of the presence and abscence of instabilities ripening in local markets in the propagation and amplitude of contagions.…”

Section: Resultsmentioning

confidence: 99%

Endogenous versus Exogenous Crashes in Financial Markets

Johansen

Sornette

2002

SSRN Journal

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In a series of papers based on analogies with statistical physics models, we have proposed that most financial crashes are the climax of so-called log-periodic power law signatures (LPPS) associated with speculative bubbles [Sornette and Johansen, 1998. In addition, a large body of empirical evidence supporting this proposition have been presented . Along a complementary line of research, we have established that, while the vast majority of drawdowns occurring on the major financial markets have a distribution which is well-described by a stretched exponential, the largest drawdowns are occurring with a significantly larger rate than predicted by extrapolating the bulk of the distribution and should thus be considered as outliers [Johansen and Sornette, 1998. Here, these two lines of research are merged in a systematic way to offer a classification of crashes as either events of an endogenous origin associated with preceding speculative bubbles or as events of an exogenous origin associated with the markets response to external shocks.We first perform an extended analysis of the distribution of drawdowns in the two leading exchange markets (US dollar against the Deutsmark and against the Yen), in the major world stock markets, in the U.S. and Japanese bond market and in the gold market, by introducing the concept of "coarse-grained drawdowns," which allows for a certain degree of fuzziness in the definition of cumulative losses and improves on the statistics of our previous results. Then, for each identified outlier, we check whether LPPS are present and take the existence of LPPS as the qualifying signature for an endogenous crash: this is because a drawdown outlier is seen as the end of a speculative unsustainable accelerating bubble generated endogenously. In the absence of LPPS, we are able to identify what seems to have been the relevant historical event, i.e., a new piece of information of such magnitude and impact that it is seems reasonable to attribute the crash to it, in agreement with the standard view of the efficient market hypothesis. Such drawdown outliers are classified as having an exogenous origin. Globally over all the markets analyzed, we identify 49 outliers, of which 25 are classified as endogenous, 22 as exogeneous and 2 as associated with the Japanese anti-bubble. Restricting to the world market indices, we find 31 outliers, of which 19 are endogenous, 10 are exogenous and 2 are associated with the Japanese anti-bubble. The combination of the two proposed detection techniques, one for drawdown outliers and the second for LPPS, provides a novel and systematic taxonomy of crashes further subtantiating the importance of LPPS.

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Section: Resultsmentioning

confidence: 99%

Endogenous versus Exogenous Crashes in Financial Markets

Johansen

Sornette

2002

SSRN Journal

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“…Empirical literature on financial crises and financial contagion also tends to highlight direct and positive effects of financial integration on business cycle synchronization (Calvo and Reinhart 1996;Claessens, Dornbusch, and Park 2001;Terrones 2003, 2007). Especially in the crisis context, with imperfect information or liquidity constraints, flight to safety can cause investors to withdraw capital from many countries simultaneously, contributing to positive output correlation.…”

Section: Literature Review: Economic Integration and Business Cycmentioning

confidence: 99%

Decoupling Asia Revisited

Park¹

2017

ADB Economics Working Paper Series

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“…However, Imbs (2006) empirically showed that a higher degree of financial integration leads to greater business cycle synchronisation between two economies. The empirical literature on financial crises and financial contagion has also tended to highlight the direct and positive effects of financial integration on business cycle synchronisation (Calvo & Reinhart, 1996;Claessens, Dornbusch & Park, 2001;Kose, Prasad & Terrones, 2003. Especially in a crisis context, with imperfect information or liquidity constraints, a flight to safety can cause investors to withdraw capital from many countries simultaneously, contributing to positive output correlation.…”

Section: Literature Review: Economic Integration and Business Cycle Smentioning

confidence: 99%

Decoupling Asia revisited

Park¹

2018

Asian Economic Integration in an Era of Global Uncertainty

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Contagion: Why Crises Spread and How This Can Be Stopped

Cited by 128 publications

References 11 publications

Endogenous versus Exogenous Crashes in Financial Markets

Endogenous versus Exogenous Crashes in Financial Markets

Decoupling Asia Revisited

Decoupling Asia revisited

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