Debt and Financial Market Contagion

51 Pages Posted: 9 Feb 2015 Last revised: 21 Apr 2021

See all articles by Cody Yu-Ling Hsiao

Cody Yu-Ling Hsiao

University of New South Wales (UNSW); Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

James Morley

University of Sydney - School of Economics

Date Written: April 20, 2021

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 2007-2021, 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.

Keywords: Contagion, debt, European debt crisis, financial crisis, Great Recession, COVID, regional linkages

JEL Classification: C51, G01, G15

Suggested Citation

Hsiao, Cody Yu-Ling and Morley, James, Debt and Financial Market Contagion (April 20, 2021). UNSW Business School Research Paper No. 2015-02, Available at SSRN: https://ssrn.com/abstract=2562121 or http://dx.doi.org/10.2139/ssrn.2562121

Cody Yu-Ling Hsiao

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

James Morley (Contact Author)

University of Sydney - School of Economics ( email )

Rm 607 Social Sciences Building
The University of Sydney
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

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