Evaluating currency crises: A multivariate Markov regime switching approach

This paper provides an empirical framework to analyse the nature of currency crises byextending earlier work of Jeanne and Masson (2000) who suggest that a currency crisismodel with multiple equilibria can be estimated using Markov regime switching (MRS)models. However, Jeanne and Masson (2000) assume that the transition probabilitiesacross equilibria are constant and independent of fundamentals. Thus, currency crisis isdriven by a sunspot unrelated to fundamentals. This paper further contributes to theliterature by suggesting a multivariate MRS model to analyse the nature of currencycrises. In the new set up, one can test for the impact of the unobserved dynamics offundamentals on the probability of devaluation. Empirical evidence shows thatexpectations about fundamentals, which are reflected by their unobserved state variables,not only affect the probability of devaluation but also can be used to forecast a currencycrisis one period ahead

The spread of a financial virus through Europe and beyond

We analyse the importance of international relations between countries on the financial stability. The contagion effect in the network is tested by implementing an epidemiological model, comprising a number of European countries and using bilateral data on foreign claims between them. Banking statistics of consolidated foreign claims on ultimate risk bases, obtained from the Banks of International Settlements, allow us to measure the exposure of contagion spreading from a particular country to the other national banking systems. We show that the financial system of some countries, experiencing the debt crisis, is a source of global systemic risk because they threaten the stability of a larger system, being a global threat to the intoxication of the world economy and resulting in what we call a `financial virus'. Illustrative simulations were done in the NetLogo multi-agent programmable modelling environment and in MATLAB.publishe

On financial contagion and implied market volatility

This paper investigates volatility contagion across U.S. and European stock markets during the Global Financial Crisis (GFC) and the Eurozone Sovereign Debt Crisis (ESDC). Using a sample of international implied volatility indices on daily changes, I explore asymmetric conditional correlation dynamics across stable and crisis periods and across the different phases of both crises. Empirical evidence indicates the existence of contagion in cross-market volatilities. A different pattern of infection is observed across the phases, since the early phase of the GFC and the late period of escalation of the Euro crisis are the most contagious periods. This implies that the initial signal of the two crises has been differently recognized by implied volatility markets. The results provide important implications for the effectiveness of international portfolio diversification and volatility hedging during periods of negative shocks. © 2014 Elsevier Inc

Contagion of the Global Financial Crisis and the real economy: A regional analysis

This paper investigates the contagion effects of the Global Financial Crisis (2007-2009) by examining ten sectors in six developed and emerging regions during different phases of the crisis. The analysis tests different channels of financial contagion across regions and real economy sectors by utilizing dynamic conditional correlation from the multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) model. Evidence shows that the GFC can be characterized by contagion effects across regional stock markets and regional financial and non-financial sectors.However, Developed Pacific region and some sectors in particular Consumer Goods, Healthcare and Technology across all regions seem to be less affected by the crisis, while the most vulnerable sectors are observed in the emerging Asian and European regions. Further, the analysis on a crisis phase level indicates that the most severe contagion effects exist after the failure of Lehman Brothers limiting the effectiveness of portfolio diversification. © 2014 Elsevier B.V

Financial crises and dynamic linkages among international currencies

This paper investigates the interdependence of US dollar exchange rates expressed in other major currencies. Focusing on different phases of the Global financial crisis (GFC) and the Eurozone Sovereign Debt Crisis (ESDC), we adopt a dynamic conditional correlation model into a multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) framework, during the period 2004-2011. The findings indicate a decrease of exchange rates correlations during the turmoil periods, suggesting the different vulnerability of the currencies. The most stable periods of the two crises for all currencies are the early phases of the GFC, while the first phase of ESDC exhibit the most cases of decreasing correlations. Finally, the Japanese yen and Swiss franc show evidence of safe heaven currencies across several phases of the two crises. The results provide crucial implications for portfolio diversification strategies and highlight the need for some form of policy coordination among central banks. © 2013 Elsevier B.V

Emerging markets and financial crises: Regional, global or isolated shocks?

This paper investigates financial contagion of three emerging market crises of the late 1990s, as well as the subprime crisis of 2007, focusing on financial markets of emerging economies, USA and 2 global indices. Conventional cointegration and vector error correction analysis show long and short run dynamics only among emerging stock markets during the Russian and the Asian crises, for both stock and bond markets during the subprime crisis, while the Argentine turmoil has no impact on any of the examined markets. Further analysis into a multivariate time-varying asymmetric framework provides evidence on the global impact of the Russian default, the contagion effects of the subprime crisis, the regional aspect of the Asian crisis and the isolated nature of the Argentine turmoil. Moreover, stock markets seem to constitute a stronger transmission mechanism during the three contagious crises. Our findings have crucial implications for international investors, policy makers and multi-lateral organizations. © 2012 Elsevier B.V

ECB’s unconventional monetary policy and bank lending supply and performance in the euro area

This paper examines the impact of the European Central Bank’s unconventional monetary policy (UMP) on bank lending supply and performance in the euro area, through comparing the evolution of bank-specific variables before and after the UMP implementation. By using a dynamic panel data analysis on banks across discrete country groups (euro zone, core, peripheral) and by controlling for bank-specific and country-level variables, we provide evidence that the bank lending decisions and performance of euro zone banks are not UMP driven, implying the limited ability of the ECB to enhance the effectiveness of banks’ lending channel and to affect banks’ profitability during the crisis. Our findings also suggest that different criteria determine banks’ lending strategy before the UMP period, bank credit strategies vary across the country samples, while the weaker economies’ banks seem to underestimate the impact of liquidity risk on their lending activity. © 2019, Academy of Economics and Finance

Equity market integration in emerging Balkan markets

This paper examines long-run relationships among five Balkan emerging stock markets (Turkey, Romania, Bulgaria, Croatia, Serbia), the United States and three developed European markets (UK, Germany, Greece), during the period 2000-2009. Conventional, regime-switching cointegration tests and Monte Carlo simulation provide evidence in favour of a long-run cointegrating relationship between the Balkan emerging markets within the region and globally. Moreover, we apply the Asymmetric Generalized Dynamic Conditional Correlation (AG-DCC) multivariate GARCH model of Cappiello et al. (2006), in order to capture the impact of the 2007-2009 financial crisis on the time-varying correlation dynamics among the developed and the Balkan stock markets. Results show that stock market dependence is heightened, supporting the herding behaviour during the 2008 stock market crash period. Our findings have important implications for international portfolio diversification and the effectiveness of domestic policies, as these emerging markets are exposed to external shocks. © 2011 Elsevier B.V