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Essays on Contagion and Linkages of International Financial Markets

Creative Commons 'BY-NC-ND' version 4.0 license
Abstract

This dissertation studies financial contagion and crisis propagation among international stock markets.

Dynamic factor model is utilized to extract the common movement of international stock markets in chapter 2. According to the ratio of stock markets return variance explained by the global stock return factor, we are able to identify the countries vulnerable to external shocks. VAR and impulse response functions are applied to study how the countries response to external financial shocks. The results indicate the countries with different development level have distinguished response to external shocks.

Chapter 3 proposed a conditional Granger causality test for finding the crisis propagation patterns across countries. The results are visualized through propagation networks, and it is clear to see the source and destination of the crises. Furthermore, the proposed framework is able to identify the active and key countries in the propagation pathway. In addition, the crisis propagation patterns are found changed a lot in the past two decades.

Chapter 4 focuses on the non-linear relationship among international stock markets. As an extension of Chapter 1, Markov switching model is employed for dating bear and bull markets in each country, country group, and the global market. In addition to the country idiosyncratic fluctuation, the countries with similar development level entered and got out of bear market in similar time. Moreover, the factors are able to capture the common bear market of the countries in the groups.

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