Empirical Research On The Cross Country Financial Crisis Contagion

The recent two decades witnessed financial crisis breaking out frequently. For eachtime the crisis would leave long-lasting influence in a certain scale and the influencebecomes increasingly severe. The crisis can easily transmit between countries via thechannels such as international business and financial market. Based on the above,further research and understanding of the financial crisis contagion can providesignificant help in reducing the destructiveness caused by the crisis transmission.This paper firstly conduct Fourier transfer on each stock market index in thesample for the following filtering, by doing which a clear developing trend can beobtained in order to discover important turning point for each financial market. Theturning points are used to separate different phases during the crisis. Vectorauto-regression models are established for each financial market under different phases.Granger Causality Tests and Impulse Response Function are also conducted in bothpre-crisis phases and after-crisis periods to test whether contagion happened or not. Theresult shows that there were contagions happening both in subprime crisis and sovereigndebt crisis. However, the contagions indicate different characteristics between the twocrises. The prior one shows a global-scaled contagion capability and the contagionfirstly started from the US out to other countries and then between countries and canalso act back on the origin. The latter crisis mainly happened within the European areaand the contagions are from the outside in. Furthermore, the contagions during the twocrises showed defferent causes. Since the US has its role as the international economyleader, the crisis orginated within it can be regarded as a common shock towards othercountries which caused the contagion. However, there is no certain country as the originof the sovereign debt crisis according to the output of the empirical analysis. Here inthis crisis, the main reason for the successively breaking out of the crisis in the SouthernEuropean countries is based on their similar economy foundation.