Debt and financial market contagion

Abstract

We empirically investigate why financial crises spread from one country to another. For our analysis, we develop a new multiple-channel test of financial market contagion and construct indices of crisis severity in equity markets in order to examine how the transmission of shocks across countries can be related to direct linkages between countries or to common characteristics. Based on network analysis with our proposed multiple-channel test for crises between 2007 and 2021, we find that the Great Recession is the most pervasive across countries, followed by the European sovereign debt crisis and the recent COVID pandemic, with the subprime mortgage crisis being the least pervasive. Our main finding is that similar public, private and external debt characteristics are particularly helpful in explaining the transmission of financial shocks during crises. Fiscal deficits appear more important than current account deficits, while stage of economic development matters more than regional linkages, but none of these indicators is as important as debt.

Resilience of Organizations in the Construction Industry in the Face of COVID-19 Disturbances: Dynamic Capabilities Perspective

“…Although these methods address the issue of the nonlinear dependence across markets, they rely on single-channel (i.e., a single transmission channel of contagion) tests and thus may be biased if the crisis sample size is small. To address this limitation, researchers have developed new methodologies to test for contagion, taking into account both linear and nonlinear dependence structures and multiple transmission channels, such as the methods of Chan et al (2019), Fry-McKibbin et al (2019), andMorley (2021). This research builds upon these advanced methodologies to model the effect of the pandemic on the construction industry.…”

“…Following Fry-McKibbin et al (2014) and Hsiao and Morley (2021), the authors also calculated the crisis severity index (CSI), namely, the percentage of the organizations in a given market that are affected by a crisis, to assess the effect of the pandemic on construction industries over time and to identify the connections between the sector's vulnerability and major crisis events. The crisis severity index (CSI k;t ) is calculated in a three-step process.…”

“…The same approach was followed to assess if construction organizations that were in poor financial positions prior to the pandemic, as indicated by their performance in various financial ratios (i.e., profitability, liquidity, financial leverage, turnover, and growth ratios), were more affected by the crisis. In this regard, the studied organizations are grouped into either the high-performance or lowperformance categories using the average of a particular ratio prior to the pandemic as a cut-off point (Hsiao and Morley 2021). For example, an organization was classified in the high-performance group if its profitability ratio prior to the pandemic was above the average of all studied organizations; if otherwise, it was included in the low-performance group.…”

Financial Contagion and Duration: Evidence from International Financial Markets

“…This was evident in the Latin America and East Asia crisis in the early 80's and late 90's respectively. There is a vast amount of research on the idiosyncratic effects of financial contagion mirrored in the rich literature on financial markets (Seth and Sighania, 2017;Paskaleva and Stoykova, 2021;Nguyen et al, 2022;Hsiao and Morley, 2022;Siddiqui et al, 2022;Lee and Kim, 2022;Uddin et al, 2022). However, it is still not clear if these market forces filter through the system for multiple periods.…”