Transmission of Financial Crises and Contagion: A Latent Factor Approach

Hardcover | January 1, 2011

byMardi Dungey, Renee A. Fry, Brenda Gonzalez-Hermosillo

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Financial crises often transmit across geographical borders and different asset classes. Modeling these interactions is empirically challenging, and many of the proposed methods give different results when applied to the same data sets. In this book the authors set out their work on a generalframework for modeling the transmission of financial crises using latent factor models. They show how their framework encompasses a number of other empirical contagion models and why the results between the models differ. The book builds a framework which begins from considering contagion in thebond markets during 1997-1998 across a number of countries, and culminates in a model which encompasses multiple assets across multiple countries through over a decade of crisis events from East Asia in 1997-1998 to the sub prime crisis during 2008. Program code to support implementation of similar models is available.

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Financial crises often transmit across geographical borders and different asset classes. Modeling these interactions is empirically challenging, and many of the proposed methods give different results when applied to the same data sets. In this book the authors set out their work on a generalframework for modeling the transmission of f...

Mardi Dungey is Professor of Economics and Finance at the University of Tasmania. Renee A. Fry is Research Associate at the Centre for Financial Analysis and Policy. Brenda Gonzalez-Hermosillo is Deputy Division Chief of Global Financial Stability in the Monetary and Capital Markets Department at the International Monetary Fund. Vance...
Format:HardcoverDimensions:192 pages, 9.25 × 6.12 × 0.98 inPublished:January 1, 2011Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199739838

ISBN - 13:9780199739837

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Table of Contents

PrefaceAcknowledgements1. Introduction2. Review of the Empirical Literature2.1 Introduction2.2 Defining Contagion2.3 A Model of Interdependence2.4 An Empirical Model of Contagion2.4.1 Bivariate Testing2.4.2 Multivariate Testing2.4.3 Structural Breaks2.4.4 Using Just Crisis Data2.4.5 Autoregressive and Heteroskedastic Dynamics2.5 Correlation and Covariance Analysis2.5.1 Bivariate Testing2.5.2 Alternative Formulation2.5.3 Multivariate Testing2.5.4 Endogeneity Issues2.5.5 Relationship with Other Models2.6 Application2.6.1 Stylized Facts2.6.2 Implementation Issues2.6.3 Contagion Testing2.7 Conclusions3. Contagion in Global Bond Markets3.1 Introduction3.2 Background of Events and Propositions3.2.1 Stylized Facts3.2.2 Propositions3.3 Data3.4 A Factor Model of Bond Spreads3.5 Estimation Method3.6 Empirical Results3.7 Conclusion3.A Data Definitions and Sources3.B Descriptive Statistics3.C Unit Root Tests3.D Estimated GARCH Models4. Contagion in Global Equity Markets4.1 Introduction4.2 A Model of Financial Turmoil4.2.1 A Benchmark Model4.2.2 A Model Incorporating Contagion4.3 Empirical Issues4.3.1 Data4.3.2 GMM Estimator4.4 Empirical Results4.4.1 Parameter Estimates4.4.2 Volatility Decompositions4.4.3 Structural Break Tests4.4.4 Robustness Checks4.4.5 Comparison with Bond Market Transmissions4.5 Conclusions5. Are Crises Alike?5.1 Introduction5.2 AModel of Contagion5.3 Empirical Factor Specification5.3.1 Noncrisis Specification5.3.2 Crisis Specification5.4 Data5.4.1 Filters5.4.2 Crisis Dates5.5 Empirical Results5.5.1 Evidence of Contagion5.5.2 Comparison of Contagion Channels Across Crises5.5.3 Testing the Channels of Contagion5.6 Robustness Checks and Additional Tests5.6.1 Crisis Dating Sensitivity Analysis5.6.2 Conditional Moment Tests5.6.3 Structural Break Tests5.7 Conclusions5.A Model Derivations5.A.1 Optimal Portfolio Weights5.A.2 Informed Conditional Expectations5.A.3 Uninformed Conditional Expectations5.A.4 Excess Returns Equation5.B Data Sources and Definitions5.C Additional Variance Decompositions6. Characterizing Global Risk6.1 Introduction6.2 A Model of Risk Premia6.2.1 Model Specification6.2.2 Identifying Risk Quantities6.2.3 Estimation6.3 Empirical Estimates6.3.1 Risk Quantities6.3.2 Risk Prices6.4 Historical Decomposition of Risk Premia6.4.1 Benchmark Spread Estimates6.4.2 Global Risk Factor Estimates6.4.3 Country Risk Factor Estimates6.4.4 Contagion Risk Factor Estimates6.5 Conclusions6.A Data Definitions and Sources6.B Crisis Dates7. ConclusionsBibliography