On cross-border bank credit and the U.S. financial crisis transmission to equity markets

46 Pages Posted: 7 Apr 2015 Last revised: 24 Mar 2017

See all articles by Cheng Yan

Cheng Yan

Essex Business School

Kate Phylaktis

City University London - Sir John Cass Business School

Ana-Maria Fuertes

Cass Business School, City University of London

Date Written: November 3, 2015

Abstract

This paper examines the role played by cross-border equity, bond and bank credit flows versus international trade in the transmission of the U.S. financial crisis to equity markets worldwide. We estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries. The results from an eclectic methodology that includes causality tests, generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade. The results are robust to altering the exogenous versus endogenous vectors of variables, to measuring equity prices in U.S. dollars or local currency, to averaging the data across countries versus averaging the parameters from individual country estimation, and to redefining the start date of the crisis. The findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability.

Keywords: U.S. financial crisis; Crisis transmission channel; Capital flows; Bank credit; International trade; Causality; Emerging markets

JEL Classification: E44; F20; F34; G1

Suggested Citation

Yan, Cheng and Phylaktis, Kate and Fuertes, Ana-Maria, On cross-border bank credit and the U.S. financial crisis transmission to equity markets (November 3, 2015). Journal of International Money and Finance, Vol. 69, No. 108-134, 2016. Available at SSRN: https://ssrn.com/abstract=2515720 or http://dx.doi.org/10.2139/ssrn.2515720

Cheng Yan (Contact Author)

Essex Business School ( email )

University of Essex
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Kate Phylaktis

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/k.phylaktis/

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

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