M. Shchepeleva (firstname.lastname@example.org),
Bank of Russia, 12, Neglinnaya Str., Moscow, 107016, Russian Federation;
MGIMO-University, 76, Vernadskogo Prosp., Moscow, 119454, Russian Federation
The article studies financial shock transmission mechanisms and cross-country linkages that make it possible. Given increased interconnections around the globe there is general agreement that in recent time financial system has become much more vulnerable to exogenous shocks. The main channels of transmission are trade and financial linkages among nations. The former are more traditional for developing countries while the latter – for developed markets. The appetite of global investors to risk, the level of uncertainty and information asymmetry in the global financial market are also important factors which can influence the magnitude of shock transmission. The article gives an overview of different methods to calculate the risks of financial shock transmission across countries including correlation and volatility analysis, contingent claims analysis, econometric models with a global factor and different types of VAR (VEC). Using the method of forecast error variance decomposition from a vector auto regression, first proposed by F. Diebold and K. Yilmaz to analyze stock markets interconnectedness, the author quantifies directions of financial shock spillovers in equity, government bond and real estate markets. This methodology was applied to 10 countries. It was found that US, Germany and France are the major transmitters of shocks to other countries. The results point to a slight difference in the magnitude of transmission in different sectors: stock markets tend to suffer more from spillover effects while government bond markets are more sensitive to internal factors of instability. The article also discusses various approaches to global systemic risk modeling which is a new area of research in recent time. Regulatory reforms which began in the post-crisis period are considered to be a necessary condition to decrease the intensity of financial shocks transmission. Taking into account how fast the shocks spillover across countries, recovery from the recession requires in the first place coordinated policy actions among governments.
1. International Monetary Fund. Consolidated Spillover Report. 2011. Available at: https://www.imf.org/external/np/pp/eng/2011/071111.pdf (accessed 2.02.2016).
2. Chinn M., Forbes K.A Decomposition of Global Linkages in Financial Markets. The Review of Economics and Statistics, 2004, vol. 86, no. 3, pp. 705-722.
3. Moser Th. What Is International Financial Contagion? International Finance, 2003, vol. 6, no. 2, pp. 157-178. DOI:10.1111/1468-2362.00113.
4. Krugman P. The International Finance Multiplier. 2008. Available at: http://krugman.blogs.nytimes.com/2008/10/05/the-international-finance-multiplier (accessed 29.07.2016).
5. Galesi A., Sgherri S. Regional Financial Spillovers across Europe: a Global VAR Analysis. IMF Working Paper. 2009, no. 09/23. 32 p.
6. Adam T., Benecka S. Financial Stress Spillover & Financial Linkages between the Euro Area & the Czech Republic. Czech Journal of Economics and Finance, 2013, vol. 63, no. 1, pp. 46-64.
7. Goldstein M. The Asian Financial Crisis Causes, Cures, and Systematic Implications. Washington, Institute of International Economics, 1998. 77 p.
8. Forbes K., Rigobon R. No Contagion, Only Interdependence: Measuring Stock Market Co-movements. NBER Working Paper. 1999, no. 7267. 39 p.
9. Frank N., Hesse H. Financial Spillovers to Emerging Markets during the Global Financial Crisis. IMF Working Paper. 2009, no. 09/104. 20 p.
10. Gonzalez-Hermosillo V., Hesse H. Global Market Conditions and Systemic Risk. IMF Working Paper. 2009, no. 230. 22 p.
11. Balakrishnan R., Danninger S., Elekdag S., Tytell I. The Transmission of Financial Stress from Advanced to Emerging Economies. IMF Working Paper. 2009, no. WP/09/133. 52 p.
12. Pesaran M., Smith R. Macroeconometric Modelling with a Global Perspective. CESifo Working Paper Series. 2006, no. 1659. 23 p.
13. Chen Q., Gray D., N’Diaye P., Oura H., Tamirisa N. International Transmission of Bank and Corporate Distress. IMF Working Paper. 2010, no. 10/124. 43 p.
14. Koop G., Pesaran M., Potter S. Impulse Response Analysis in Nonlinear Multivariate Model. Journal of Econometrics, 1996, no. 74, pp. 119-147.
15. Diebold F., Yilmaz K. On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms. NBER Working Paper 2011, no. 17490. 36 p.
16. Sullivan R., Peterson S., Waltenbaugh D. Measuring Global Systemic Risk: What Are Markets Saying about Risk? Journal of Portfolio Management, 2010, vol. 37, no.1, pp. 67-77.
17. Volatility Institute (V–LAB). Available at: http://vlab.stern.nyu.edu/ (accessed 05.05.2016).
18. Brownlees T., Engle R. SRISK: A Conditional Capital Shortfall Index for Systemic Risk Measurement. Unpublished Working Paper, 2015. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1611229 (accessed 29.07.2016).
19. International Monetary Fund. Financial Stability Report. April 2015. Available at: http://www.imf.org/external/pubs/ft/gfsr/2015/01/ (accessed 29.07.2016).
20. IMF Urges Rethink of How to Manage Global Systemic Risk. IMF Survey Magazine. Available at: http://www.imf.org/external/pubs/ft/survey/so/2009/pol030609a.htm (accessed 29.07.2016).
Registered in system SCIENCE INDEX