On The Shift And Pure Contagion Effect Of International Finance Crisis In Currency Market

With the continuous deepening of finance globalization and liberalization,humanity has entered an era of financial crisis with an increasing prone, infectious anddestructive.[1]Whether the exchange rate regime crisis in Europe(1992-1993), theSoutheast Asian financial crisis (1997-1998), the Russian financial crisis (1998) and theBrazilian financial crisis (1998-1999), or the United States financial crisis in the21stcentury, have shown a strong infectious, and then attracted the economics scholars’extensive attention. Meanwhile, during the financial crisis, the continuous and frequentfluctuations in many countries’ currency markets have also become a major feature.Therefore, the researches in contagion effect of financial crisis and exchange rate risk inorder to create a financial risk early warning system and prevent the further spread ofinfection are of great significance to safeguard the security of a country’s foreignexchange market, and even keep global economic and financial system’ stability.This paper makes a theoretical analysis from the definition, transmissionmechanism and decomposition of the contagion effect in financial crisis. And then takeup the bivariate econometric model which was made by Thomas J.Flavin and NuiMaynooth (2010) to measure thecommon and idiosyncratic shocks’ effect on8foreignexchange markets pairs. With parameters and to detect the shift and purecontagions in USD, AUD, CHF, CNY, EUR, GBP, JPY, RUB, SGD (8market pairs intotal) from January1,2000to December31,2013.The results show that under different economics regimes, high-volatility regime andlow-volatility regime, the influences from the common shock and idiosyncratic shockare clearly different. The smallest common shock’s influence gap between these tworegimes exists in the CNY market, which shows that in both the financial crisis periodand steady economic period, the influence of the systemic risk on CNY has no bigchange. The CNY has a lower sensitivity to external economic change, leading to thehigher stability of the foreign exchange market. The idiosyncratic shock from USDmarket impacts the8markets strongly.From the aspect of the parameters, of8market pairs are far larger then1, withthe lowest of USD-CNY and the highest of USD-RUB, which indicates that theshift contagion effect exists in8market pairs obviously. While all pairs’ are biggerthen0, which means that pure contagion effect exists in all market pairs. The strongest effect are in USD-EUR, USD-AUD and USD-JPY market pairs and USD-CNY has theweakest pure effect.