Two "Once-in-100-Year" Crises in Twelve Years - Are Channels for Financial Contagion Still the Same?

38 Pages Posted: 3 Aug 2020 Last revised: 28 Oct 2020

See all articles by Haiying Wang

Haiying Wang

Independent

Ying Yuan

Northeastern University - School of Business Administration

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Date Written: July 16, 2020

Abstract

The past twelve years were punctuated by increasingly complex dynamics of the cross-market interdependence and two ``once-in-100-year'' global financial crises, including the 2020 financial contagion through increased physical contagion during the COVID-19 pandemic. This paper develops a non-linear financial contagion network via a dynamic mixture copula-EVT (extreme value theory) model to quantitatively detect and measure the complex nature of financial contagion. Considering the crisis transmission from both macroeconomic fundamentals and investor constraint perspectives, we identify and investigate the dynamics of transmission channels for both 2008 and 2020 financial crises. More specifically, we explore the wealth effect and portfolio rebalancing through the asymmetric tail contagion channels across 22 major emerging and developed stock markets and compare the differences between the two major crises. Moreover, motivated by the V-shape rebound in these two crises, we examine and find evidence that the transmission channels between the market melt-down and melt-up periods are different. Our findings shed new light on the dynamics of crisis transmission mechanisms across countries and provide important implications for international investors and policymakers.

Keywords: Financial Contagion, Crisis Transmission, COVID-19, Dynamic Mixture Copula, Extreme Value Theory

JEL Classification: C22, C51, G15

Suggested Citation

Wang, Haiying and Yuan, Ying and Wang, Tianyang, Two "Once-in-100-Year" Crises in Twelve Years - Are Channels for Financial Contagion Still the Same? (July 16, 2020). Available at SSRN: https://ssrn.com/abstract=3653279 or http://dx.doi.org/10.2139/ssrn.3653279

Haiying Wang

Independent ( email )

Ying Yuan

Northeastern University - School of Business Administration ( email )

Shenyang, 110004
China

Tianyang Wang (Contact Author)

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

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