Transmission of Financial Crises and Contagion Finance and the Economy A CERF Series edited by John Eatwell The Cambridge Endowment for Research in Finance (CERF) was founded in 2001 as an independent resource at the University of Cambridge It is dedicated to developing an enhanced understanding of the evolution and behaviour of financial markets and institutions, notably in their role as major determinants of economic behaviour and performance CERF promotes theoretical, quantitative and historical studies, crossing conventional disciplinary boundaries to bring together research groups of economists, mathematicians, lawyers, historians, computer scientists and market practitioners Particular attention is paid to the analysis of the impact of financial market activity on the formulation of public policy As well as individual research projects, CERF funds Cambridge Finance, the organisation that brings together researchers in finance from all departments of Cambridge University The CERF series of publications on Finance and the Economy embodies new research in these areas Global Governance of Financial Systems: The International Regulation of Systemic Risk Edited by Kern Alexander, Rahul Dhumale, and John Eatwell Identifying International Financial Contagion: Progress and Challenges Edited by Mardi Dungey and Demosthenes N Tambakis Transmission of Financial Crises and Contagion: A Latent Factor Approach Coauthored by Mardi Dungey, Renée A Fry, Brenda González-Hermosillo, and Vance L Martin Transmission of Financial Crises and Contagion A Latent Factor Approach Mardi Dungey, Renée A Fry, Brenda González-Hermosillo, and Vance L Martin 3 Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Copyright © 2011 by Oxford University Press Published by Oxford University Press, Inc 198 Madison Avenue, New York, New York 10016 www.oup.com Oxford is a registered trademark of Oxford University Press All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press Library of Congress Cataloging-in-Publication Data Transmission of financial crises and contagion : a latent factor approach/ Mardi Dungey [et al.] p cm Includes bibliographical references and index ISBN 978-0-19-973983-7 (cloth : alk paper) Financial crises—Mathematical models International finance—Mathematical models Transmission mechanism (Monetary policy) I Dungey, Mardi HB3722.T73 2010 332’.042015915—dc22 112009051238 Printed in the United States of America on acid-free paper Contents Introduction Review of the Empirical Literature Contagion in Global Bond Markets 47 Contagion in Global Equity Markets 79 Are Crises Alike? Comparing Financial Crises 105 Characterizing Global Risk in Emerging Markets 159 Conclusions 189 Bibliography 195 Index 205 v This page intentionally left blank Preface Contagion in financial markets is a general term that is widely used in academic research, policy debates, and the media to represent the spread of shocks through asset markets within countries and across national borders during times of financial crises Contagion as a description of financial crises, was first introduced during the Asian financial crisis of 1997–98, beginning with the large depreciation of the Thai bhat on July 2, 1997 The term was subsequently used to explain the spread of shocks during other financial crises such as the Russian bond default in 1998, the collapse of Long Term Capital Management (LTCM) in September 1998, the crisis in Brazilian asset markets in early 1999, the dot-com bust/correction in 2000, the Argentinian crisis from 2001 to 2005, and more recently the global financial crisis that began with the U.S subprime mortgage and credit crisis stemming from mid-2007 Despite the widespread use of contagion to describe the transmission of shocks, much of the earlier empirical work lacked a coherent framework in which to estimate and test the presence of contagion Part of the problem stemmed from the difficulty in measuring contagion per se, as the presence of contagion in contributing to increases in asset market volatility during financial crises was always inferred and never directly measured The approach adopted by the authors in this collection of papers is to use a modelling framework to identify and to test for contagion for various markets and episodes in times of stress A common underlying theme of the modelling vii viii preface framework is the use of latent factors to capture many of the linkages that connect asset markets both nationally and internationally during financial crises The use of latent factors provides a useful and flexible way to quantify both the size and the significance of contagion in affecting volatility in times of financial crises The flexibility of the approach is highlighted in Chapter where the modelling framework is used to summarize many of the existing empirical modelling techniques commonly adopted to study contagion The importance of the framework is demonstrated in Chapter 3, where it is used to understand the role of contagion in transmitting shocks in international bond markets during the Russian and LTCM crises of 1998, and in Chapter 4, where the focus is on studying the effects of the Russian bond default on international equity markets A broader range of financial crises is considered in Chapter 5, where various crises are compared and identified for potential common linkages, beginning with the Russian crisis and ending with the recent U.S subprime crisis This chapter is cowritten with Chrismin Tang, and sample Gauss code and data for the chapter are available at http://www.dungey.bigpondhosting.com Having established that contagion exists but varies in importance across crises and financial markets, in Chapter the emphasis turns to modelling the time-varying contribution of contagion effects in emerging markets via a model of global risk This shows that most of the time contagion effects are dominated by other components of risk in markets The overall policy conclusions outlined in Chapter include the result that while there is definite evidence for significant and sometimes substantial contagion effects in crises, the variation in its relative contribution means that it would be a mistake to base financial market reforms solely on evidence of the existence of contagion channels Acknowledgments A number of people have been important at various stages in providing comments on the chapters, including Monica Billio, Hans Blommestein, Andrea Cipollini, David Cook, Roger Craine, John Creedy, Jon Danielsson, Amil Dasgupta, Jakob de Haan, Jurgen Doornik, Jerry Dwyer, Barry Eichengreen, Sylvester Eijssinger, Robert Eisenbeis, Carlo Favero, Thomas Flavin, Prasanna Gai, Charles Goodhart, Don Harding, Lex Hoogduin, Harry Huizinga, Leslie Hull, Takatoshi Ito, Jose Lopez, Graciela Kaminsky, Laura Kodres, Jenny Ligthart, Paul Masson, Minhael McAleet, Marcus Miller, Adrian Pagan, Hashem Pesaran, Andreas Pick, Olwen Renowden, Roberto Rigobon, Hyun Shin, Demosthenes Tambakis, Susan Thorp, Reza Vaez-Zadeh, David Vines, and Mike Wickens Special thanks go to the International Monetary Fund where much of the work was initiated and written The authors have also benefitted from the suggestions of anonymous referees and comments received at various seminars where earlier versions of the chapters were presented Dungey and Martin also acknowledge funding from ARC Large Grant A00001350, while Fry acknowledges funding from ARC grant DP0556371 We are grateful to the editors and publishers for permission to reprint the material in Chapters to Chapter is reprinted from Quantitative Finance, Volume 5, Edition 1, pp 9–24, 2005, as “Empirical Modelling of Contagion: A Review of Methodologies” with permission from Taylor & Francis Group, http://www.informaworld.com Chapter is ix Index Figures and tables are indicated by f and t following page numbers A Arbitrage Pricing Theory, 13 Argentina See also Emerging markets, contagion effects on bond trading (2007), 112 comparison of financial crises, 112, 131, 134–35 bond market contagion effect, 121f, 126t, 130t, 133t, 139–40t equity market contagion effect, 98t, 120f, 125t, 129, 130t, 131, 132t, 139–40t credit vs liquidity risk, 171 crisis See Argentinian crisis (2001–2005) regional effects and, 60, 61, 69 Russian/LTCM crisis and bond market contagion, 51f, 53f, 60, 61, 68, 68t, 69–71, 72t, 101t, 130, 130t Russian/LTCM crisis and equity market contagion, 81, 82, 88f, 91–92t, 94t, 95–97, 97–98t, 100, 101t Argentinian crisis (2001–2005), comparison to other crises See also 205 Comparison of financial crises Asian currency crisis, similarity to, 44 bond market contagion effect, 126t, 130t breakdown of contribution of contagion channels during financial crises, 132–36, 135t, 136, 143 bond markets, 133t equity markets, 132t common factors underlying, 127–28, 128t conditional moment tests, 139–40, 140t data sources and definitions, 152–53t dates of crisis, 123t, 124, 136–39, 137f, 139t equity market contagion effect, 125t, 130t Mexican bonds and, 32 model specification of, 117 strength of contagion, 131 variance decompositions, 157t Wald tests of channels of contagion, 135t, 136 of structural breaks, 140–42, 141t 206 Asian crisis of 1997–98, 37–45 countries most affected by contagion, 69–70, 103 modeling currency returns for, 11 move from fixed to floating exchange rates, 20 volatility decompositions, 40–41, 41–42t Asian Monetary Union and Asian reserve funds, calls for, 190 Augmented Dickey Fuller (ADF) unit root tests, 77t Autoregressive and heteroskedastic dynamics, 20–22 B Bae, K.H., G.A Karolyi, and R.M Stulz, 3, 10, 35–36, 38, 39–40, 41, 44, 45, 57 Baig, T and I Goldfajn, 12, 70, 80, 130 Banking relationships, 190, 193 Bekaert, G., E Engstrom, and S.R Grenadier, 160 Bekaert, G., E Engstrom, and Y Xing, 160 Bekaert, G., C.R Harvey, and A Ng, 10, 13, 19, 21, 122 Bekaert, G and R Hodrick, 9, 112 BEKK specification, 22 Bias found, 190 Bivariate tests of contagion, 16–17 correlation and covariance analysis, 23–25 structural breaks in, 31 Bloomberg database, 58, 87 Bollerslev, T., R.Y Gibson, and K.F Zhou, 160 Bond markets, 3–4, 47–78 See also Russian/LTCM crisis index (1998); specific crises and countries breakdown of contribution of contagion channels during financial crises, 133t, 143 comparison of crisis effects on, 129–31, 130t equity markets compared with, 99–101, 101t spread over period February 1998 to May 1999 (Russian to Brazilian crisis), 159–60, 161–62t, 169–73, 170t Brady bonds, 58 Brazil See also Emerging markets, contagion effects on bond trading (2007), 112 comparison of financial crises, 112, 131 bond market contagion effect, 111f, 121f, 126t, 130t, 133t, 139–40t equity market contagion effect, 98t, 120f, 125t, 129, 131, 132t, 133–34, 139–40t credit vs liquidity risk, 171 crisis See Brazilian crisis (1999) global risk factor estimates, 178, 179–80f, 181t regional effects and, 60, 61 Russian/LTCM crisis and bond market contagion, 51f, 53f, 60, 61, 68, 68t, 69–70, 72t, 73, 74, 101t, 103, 129 Russian/LTCM crisis and equity market contagion, 81, 82, 88f, 91t, 92t, 94t, 96, 97, 97t, 98t, 100, 101t, 103 index Brazilian crisis (1999), comparison to other crises See also Comparison of financial crises bond market contagion effect, 130t breakdown of contribution of contagion channels during financial crises, 132–35, 142–43 bond markets, 133t equity markets, 132t common factors underlying, 127–28, 128t conditional moment tests, 139–40, 140t country risk components and, 185 credit vs liquidity and volatility risk prices, 172 data sources and definitions, 152–53t dates of crisis, 123, 123t, 136–39, 137f, 187 equity market contagion effect, 125t, 130t model specification of, 117 risk components and, strength of contagion, 130–31, 173 variance decompositions, 155t Wald tests of channels of contagion, 135t, 136 of structural breaks, 140–42, 141t Breakdown of contribution of contagion channels during financial crises, 132–36, 143, 191, 192 bond markets, 133t equity markets, 132t Wald test, 135t 207 Brunnemeier, M., A Crockett, C Goodhart, A Persuad, and H Shin, 103, 144 Bulgaria See also Emerging markets, contagion effects on credit vs liquidity risk, 171 risk prices, 173 Russian/LTCM crisis and bond market contagion, 52f, 57, 58, 61, 68, 68t, 69, 71–72, 72t, 73, 101t Russian/LTCM crisis and equity market contagion, 101t Burger, J.D and F.E Warnock, 160 C Calvo, G.A and E.G Mendoza, 12 Campbell, J., 166 Canada comparison of financial crises, 112, 131 bond market contagion effect, 111f, 121f, 126t, 129, 130t, 133t, 139–40t equity market contagion effect, 98t, 120f, 125t, 129, 130t, 132t, 139–40t data sources and definitions, 152–53t variance decompositions, 154–58t Chernov, M.E., R.A Gallant, E Ghysels, and G Tauchen, 21 Chinese equity markets (February 27 and March 13, 2007), 122 Chow test, 26, 29, 33 Claessens, S See Dornbusch, R Cochrane, J and M Piazzesi, 163 index 208 Committee on the Global Financial System, 55, 57, 58, 63, 71, 73, 80, 102, 187 Comparison of financial crises, 5, 105–58 bond markets compared to equity markets for contagion, 99–101, 101t, 129–31, 130t breakdown of contribution of contagion channels during financial crises, 132–36, 143, 191, 192 bond markets, 133t equity markets, 132t commonality among crises, 105, 107, 142, 144, 193 data, 118–25 dates and timing of crises, 123–24 filters, 119–23, 120–21f, 125–26t sources and definitions, 152–53t empirical factor specification, 112–18 crisis specification, 114–18 noncrisis specification, 113–14 empirical results, 125–36 comparison of contagion channels across crises, 132–33t, 132–35 evidence of contagion, 128–31 testing contagion channels, 135–36 lack of commonality among crises, 105, 107, 144, 193 model derivations, 145–52 excess returns equation, 150–52 informed conditional expectations, 147 optimal portfolio weights, 145–47 uninformed conditional expectations, 148–50 robustness checks, 136–42 conditional moment tests, 139–40, 140t crisis dating sensitivity analysis, 136–39, 137f structural break tests, 140–42, 141t theoretical model of contagion, 108–12 Conditional moment tests, 110–12, 122, 139–40, 140t Contagion See also specific crises and countries defined, 11–13, 163, 189 difference of outcomes in assessment of, 37–45 See also Comparison of financial crises empirical model of, 15–22 autoregressive and heteroskedastic dynamics, 20–22 bivariate testing, 16–17 just crisis period data, 20 multivariate testing, 17–18 structural breaks, 18–20 fundamentals-based contagion, in global bond markets, 47–78 See also Bond markets in global equity markets, 79–103 See also Equity markets importance for policy makers, 192 measurement issues, vii–viii pure contagion, index unwarranted contagion, 12 use of term, vii, 1–2 Contingency planning, 7, 193 Coordinated crisis prevention policy, 103 Correlation and covariance analysis, 22–37 alternate formulation, 25–28 bivariate testing, 23–25 endogeneity issues, 3, 30–33 multivariate testing, 3, 28–30 relationship with other models, 33–37 Corsetti, G., M Pericoli, and M Sbracia, 10, 13 Country channels as transmission mechanisms, 106–7 breakdown of contribution of contagion channels during financial crises, 132–33t, 132–36, 142–43, 192 Country risk factor estimates, 6, 182, 183–84f Country shocks, 114 Credit risk See Risk in emerging markets Credit Swiss First Boston, 58 Crisis specifications See specific crises Crockett, A See Brunnemeier, M., Cross-jurisdiction supervision, 193 Cross-market, cross-border model, 191 See also Breakdown of channels of contagion D Dates of crisis periods, 39, 123–24, 136–39, 137f, 139t Determinant of change in the covariance matrix (DCC) test, 29–30 209 Diebold, F.X and M Nerlove, 60, 66 Dooley, M.P., 59 Dornbusch, R., Y.C Park, and S Claessens, 9, 11, 15 Dot-com crisis (2000) bond market contagion effect, 126t, 130t breakdown of contribution of contagion channels during financial crises, 132–35, 143 bond markets, 133t equity markets, 132t common factors underlying, 127–28, 128t conditional moment tests, 139–40, 140t dates of crisis, 123t, 124, 136–39, 137f equity market contagion effect, 125t, 130t model specification of, 117 strength of contagion, 131 variance decompositions, 156t Wald tests of channels of contagion, 135t, 136 of structural breaks, 140–42, 141t Duffie, D and K Singleton, 65 Dumas, B and B Solnik, 112 Dungey, M., R.A Fry, B González-Hermosillo, and V.L Martin Asian equity markets, contagion testing of, 40–44 correlation and covariance analysis, 33–34 data definitions and sources, 74 defining contagion, 11 210 Dungey, M., R.A Fry, B (Cont’d) empirical model of contagion, 15, 16, 21 filtering of data, 122 implementation issues, 38, 39–40 model of interdependence, 13 structural break, 84 Dungey, M., R.A Fry, and V.L Martin, 38 Dungey, M and V.L Martin, 10, 13, 16, 21, 106, 112, 114, 122, 143 Dungey, M., V.L Martin, and A.R Pagan, 60 Dungey, M., G Milunovich, and S Thorp, 70, 144 Durbin, J.M., 33 E Eastern European countries, 49, 57, 61, 69 See also specific countries Edwards, S., 59 Efficient Method of Moments (EMM), 65 Ehrmann, M., M Fratzscher, and R Rigobon, 102 Eichengreen, B., A.K Rose, and C Wyplosz, 3, 10, 13, 35, 36, 39, 45, 57, 59 Ellis, L and E Lewis, 12 Emerging markets, contagion effects on See also Risk in emerging markets; specific countries bond market and Russian bond crisis, 57, 58, 129–31, 159 comparison of financial crises, 103, 112 equity market and LTCM crisis, 81, 95–96, 102 Empirical literature review, 2–3, 9–46 index application of alternative methodologies, 3, 37–44 contagion testing, 40–44 implementation issues, 38–40 stylized facts, 38, 38t contagion, model of, 15–22 See also Contagion correlation and covariance analysis, 22–37 alternate formulation, 25–28 bivariate testing, 23–25 endogeneity issues, 3, 30–33 multivariate testing, 3, 28–30 relationship with other models, 33–37 Endogeneity issues, 3, 30–33 Engle, R.F See Ng, V.K Engle, R.F., T Ito, and W Lin, Engstrom, E See Bekaert, G Equity markets, 4, 5, 57, 79–103 See also specific crises comparison of crisis effects on, 129–31 empirical issues, 87–93 data, 87, 88–89f, 90, 91–92t GMM estimator, 90–93 empirical results, 94–101 comparison with bond markets, 99–101, 101t parameter estimates, 94–96, 94t, 96t robustness checks, 99 structural break tests, 99 volatility decompositions, 96–98, 97t model of financial turmoil, 80–86 benchmark model, 81–83 contagion incorporated into model, 83–86 index LTCM, incorporating contagion from, 85–86 Russia, incorporating contagion from, 84–85 Estimation method, 64–67 Euler equation, 164 Europe, contagion in bond markets of, Exchange rates, move between fixed and floating, 20, 106 Ex post observation of events, 39 F Factor model See Latent factor approach Fadner, R See Grubel, H.G Favero, C.A and F Giavazzi, 2, 3, 10, 12, 34–36, 39, 45, 73 Federal Reserve data from, 58 rate cuts, 47, 50, 55, 69 Filtering data, 39, 119–23, 120–21f, 125–26t Fiorentini, G See Sentana, E Fiorentini, G., E Sentana, and N Shephard, 65 First generation models, 105–6 Fisher transformation, 24–25 Flood, R.P and A.K Rose, 163 Forbes, K and R Rigobon Asian crisis and Hong Kong equity market, 38, 41–45 bond spreads, factor model of, 60 correlation and covariance analysis, 22–28 defining contagion, 73 endogeneity issues, 30–31 implementation issues, 39 minimal effect of contagion for asset markets, 182 211 multivariate form of bivariate Forbes and Rigobon correlation test, 190 relationship with other models, 33–35 structural break tests, 141 test of contagion, 2, 3, 10, 12, 13, 15, 19 time zone differences, 87 Fratzscher, M See Ehrmann, M Fry, R.A See Dungey, M Fundamentals-based contagion, 2, 57 G Gallant, A.R See Chernov, M.E Gallant, A.R and G Tauchen, 65 GARCH models, 21–22, 59, 62, 77, 78t, 122, 144 GAUSS procedure, 67, 93, 127, 169 Generalized Method of Moments (GMM), 18, 64, 90–93, 102, 125, 127, 129 Germany Russian/LTCM crisis and bond market contagion, 101t Russian/LTCM crisis and equity market contagion, 81, 89f, 91–92t, 94t, 95–98, 97–98t, 100, 101t Ghysels, E See Chernov, M.E Giavazzi, F See Favero, C.A Gibson, R.Y See Bollerslev, T Glick, R and A.K Rose, 39, 57, 59, 60, 82, 100 GMM See Generalized Method of Moments Gochoco-Bautista, M.S See Reside, R.E., Jr Goldfajn, I See Baig, T Goldstein, M., 11, 55 212 Goldstein, M., G.L Kaminsky, and C.M Reinhart, 12, 70 González-Hermosillo, B See Dungey, M Goodhart, C See Brunnemeier, M., Gourieroux, C and A Monfort, 64, 65 Gourieroux, C., A Monfort, and E Renault, 65, 67 Granger, C., B Huang, and C Yang, 102 Gregory, A.W and D.G Watts, 60 Grenadier, S.R See Bekaert, G Grubel, H.G and R Fadner, H Hang Seng Index, 37 Hartmann, P., S Straetmans, and C.G de Vries, 102 Harvey, C.R See Bekaert, G Heightened awareness, 11 Herd behavior, 11–12 Hernández, L and R Valdés, 80 High-frequency data, 39 Hodrick, R See Bekaert, G Hong Kong currency crisis (1997), 3, 37–45, 38t, 190 See also Asian crisis of 1997–98 Russian/LTCM crisis and bond market contagion, 101t Russian/LTCM crisis and equity market contagion, 81, 88f, 91t, 92t, 94t, 97, 97t, 98t, 101t volatility decompositions, 40–41, 41t Hong Kong Monetary Authority, 90 index I Idiosyncratic shocks bond market contagion and, 62 as contagoius transmission mechanisms, 106, 142 breakdown of contribution of contagion channels during financial crises, 132–33t, 132–36, 142–43 equity market contagion and, 83, 85, 86, 97–99 Indirect estimation, 65–67 Indonesia See also Emerging markets, contagion effects on credit vs liquidity risk, 171 Russian/LTCM crisis and bond market contagion, 51f, 53f, 60, 61, 68–71, 68t, 72t, 101t Russian/LTCM crisis and equity market contagion, 101t Industrial equity markets See also specific countries comparison of financial crises, 112 contagion effects of Russian bond crisis on, 81, 95, 102, 129 Informed investors in model of contagion, 108–12 Interdependence, model of, 13–15 International Monetary Fund, 70, 160 Ito, T See Engle, R.F J Japan Hong Kong equity market crisis and, 37 Russian/LTCM crisis and bond market contagion, 101t index Russian/LTCM crisis and equity market contagion, 81, 89f, 91–92t, 94t, 95–96, 97–98t, 98, 100, 101t Jorion, P., 50, 90 JP Morgan, 6, 163, 182, 186 K Kalman filter, 21, 64 Kaminsky, G.L and C.M Reinhart, 39–40, 56, 57, 60, 79–80, 134 Kaminsky, G.L and S.L Schmukler, 12 Karolyi, G.A See Bae, K.H Kharas, H., B Pintos, and S Ulatov, 90 King, M., E Sentana, and S Wadhwani, 60, 80 King, M and S Wadhwani, Kodres, L.E and M Pritsker, 5, 106, 108, 142, 143, 191 Korea See also Emerging markets, contagion effects on equity markets, 37, 38, 40–44, 41–42t risk factor estimates for, 182 Russian/LTCM crisis and bond market contagion, 51f, 53f, 60, 61, 68, 68t, 69, 72t, 101t Russian/LTCM crisis and equity market contagion, 101t Krueger, A., 70 Kruger, M., P.N Osakwe, and J Page, 12, 13 Krugman, P., 12 Kumar, M and A Persaud, 63, 160 Kyle, A and W Xiong, 11 213 L Latent factor approach advantages of, bond spreads and, 48, 60, 73 definitions of contagion and, 12 empirical factor specification, viii, 112–18 crisis specification, 114–18 noncrisis specification, 113–14 empirical results of common factors in crisis models, 3, 127, 128t model of contagion and, 4, 107, 108, 143–44, 190 model of interdependence, 13–15 Latin American markets See specific countries Lewis, E See Ellis, L Lin, W See Engle, R.F Linkages between asset markets, See also Contagion Liquidity risk See Risk in emerging markets Loisel, O and P Martin, 11 Longin, F and B Solnik, 112 Long Term Capital Management (LTCM) See Russian/LTCM crisis Lowell, J., C.R Neu, and D Tong, 11, 55 Lowenstein, R., 90 M Mahieu, R and P Schotman, 15, 60 Malaysia equity markets, 37, 38, 40–44, 41–42t Market channels as specific transmission mechanisms, 106, 142 214 Market channels (Cont’d) breakdown of contribution of contagion channels during financial crises, 132–33t, 132–36, 142–43 Wald tests of channels of contagion, 135, 136t Market shocks, 114 Martin, P See Loisel, O Martin, V L See Dungey, M Masson, P., 11, 15, 73 Mendoza, E.G See Calvo, G.A Mexican crisis (1994) data sources and definitions, 152–53t relation to Argentinian bonds, 32 similarity to Asian currency crisis, 44 variance decompositions, 154–58t Mexico See also Emerging markets, contagion effects on bond trading (2007), 112 comparison of financial crises, 112, 131, 134 bond market contagion effect, 111f, 121f, 126t, 133t, 139–40t equity market contagion effect, 98t, 120f, 125t, 132t, 139–40t regional effects and, 60, 61 Russian/LTCM crisis and bond market contagion, 51f, 53f, 60, 61, 68, 68t, 69, 71, 72t, 101t, 129, 134 Russian/LTCM crisis and equity market contagion, 101t Milunovich, G See Dungey, M Missing observations, 40, 58, 74, 87, 119 index Mody, A and M.P Taylor, 21 Monsoonal shocks, 11 Monte Carlo analysis, 30 Multiple equilibria models, 11 Multiple regime model allowing for multiple crises, 102–3, 185–86 Multivariate tests of contagion, 3, 17–18 correlation and covariance analysis, 28–30 N Nerlove, M See Diebold, F.X Nested crises, 103, 144 Netherlands offshore banking exposure, 56, 57t regional effects and, 61 Russian/LTCM crisis and bond market contagion, 52f, 57, 61, 68, 68t, 69, 71, 72t, 73, 100, 101t, 103 Russian/LTCM crisis and equity market contagion, 100, 101t Neu, C.R See Lowell, J News effects, 12 New York Federal Reserve, 50 Ng, A See Bekaert, G Ng, V.K., R.F Engle, and M Rothschild, 60 Noise traders in model of contagion, 108–12 Noncrisis periods asset markets linked during, 1, 106, 124, 125–26t crisis dating and, 136–38 factor specification in, 113–14 model of interdependence and, 13 risk price estimates in, 163–64 structural breaks and, 140–41 index O Offshore banking exposure, 56, 57t Osakwe, P.N See Kruger, M P Pagan, A.R See Dungey, M Page, J See Kruger, M Park, Y.C See Dornbusch, R Pericoli, M See Corsetti, G Pericoli, M and M Sbracia, 9, 11, 15 Persaud, A See Brunnemeier, M.; Kumar, M Phillips Perron (PP) unit root tests, 77t Piazzesi, M., 164 See also Cochrane, J Poland See also Emerging markets, contagion effects on credit vs liquidity risk, 171 risk prices, 173 Russian/LTCM crisis and bond market contagion, 52f, 57, 58, 61, 68, 68t, 69, 72t, 73, 101t Russian/LTCM crisis and equity market contagion, 81, 88f, 91t, 92t, 94t, 97, 97t, 98t, 100, 101t Policy implications for contagion management and prevention, viii, 144, 189, 192–94 Pritsker, M., 56 See also Kodres, L.E Probability model, 2–3 215 Regional effects, 57, 60–61, 68, 103, 190 Regulation for sound financial networks, 194 Reinhart, C.M See Kaminsky, G.L Reside, R.E., Jr and M.S Gochoco-Bautista, 12 Rigobon, R., 29, 30, 32–33, 80 See also Ehrmann, M.; Forbes, K Rigobon, R and B Sack, 90 Risk in emerging markets, 6, 159–87, 192 crisis dates, 186–87 data definitions and sources, 186, 187t empirical estimates, 169–73 risk prices, 171–73, 172–73t risk quantities, 169–71, 170t historical decomposition of risk premia, 163, 173–82 benchmark spread estimates, 175, 176–77f contagion risk factor estimates, 6, 182 country risk factor estimates, 6, 182, 183–84f global risk factor estimates, 6, 178, 179–80f model of risk premia, 5–6, 163, 164–69 estimation, 169–73 identification of risk quantities, 166–68 model specification, 164–66 Robustness checks, 99, 136–42 R Radelet, S and J Sachs, 70 Recapitalization of LTCM hedge fund, 50, 55, 59, 73 conditional moment tests, 139–40, 140t crisis dating sensitivity analysis, 136–39, 137f 216 Robustness checks (Cont’d) structural break tests, 140–42, 141t Rose, A.K See Eichengreen, B.; Flood, R.P.; Glick, R Rothschild, M See Ng, V.K Russia See also Emerging markets, contagion effects on; Russian/ LTCM crisis (1998) bond trading (2007), 112 comparison of financial crises, 131, 134, 135 bond market contagion effect, 111f, 121f, 126t, 133t, 139–40t equity market contagion effect, 98t, 120f, 125t, 132t, 139–40t interval between Russian/LTCM crisis and Brazilian crisis, 159–60 risk prices, 173 Russian/LTCM crisis and bond market contagion, 52f, 61, 68, 68t, 72t, 101t, 130, 131 Russian/LTCM crisis and equity market contagion, 81, 88f, 91t, 92t, 94t, 97, 97t, 98t, 100, 101t Russian/LTCM crisis (1998), 3–4, 47–78 bond market contagion effect, 126t breakdown of contribution of contagion channels during financial crises, 132–35, 142 bond markets, 133t equity markets, 132t index common factors underlying, 127–28, 128t conditional moment tests, 139–40, 140t contagion effects demonstrated, 73, 103, 107, 129, 142 contagion risk factor estimates, 182, 183–84f countries most affected by, 49, 51–54f, 55–57, 103 data, 57–59, 74, 75–76t, 152–53t country risk components and, 185 credit risk and, 185 as crisis of credit, 115, 188 dates of crisis, 123, 123t, 136–39, 137f, 186–87 descriptive statistics, 76t effect on international markets, 4, empirical estimates risk prices, 171–73, 172–73t risk quantities, 168t, 169–71 empirical results, 67–72 equity market contagion effect, 88f, 125t, 129–31, 130t estimated GARCH models, 77, 78t estimation method, 64–67 factor model of bond spreads, 49, 59–64 global risk factor estimates, 178, 179–80f, 181t model specification of, 115–17 proposition based on contagion, 56, 69 proposition based on exposure through banking system, 56, 57t, 69 ... Contagion: A Latent Factor Approach Coauthored by Mardi Dungey, Renée A Fry, Brenda González-Hermosillo, and Vance L Martin Transmission of Financial Crises and Contagion A Latent Factor Approach. .. Alexander, Rahul Dhumale, and John Eatwell Identifying International Financial Contagion: Progress and Challenges Edited by Mardi Dungey and Demosthenes N Tambakis Transmission of Financial Crises and. .. Congress Cataloging-in-Publication Data Transmission of financial crises and contagion : a latent factor approach/ Mardi Dungey [et al. ] p cm Includes bibliographical references and index ISBN