Global crises and equity market contagion

Using the 2007-2009 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use an asset pricing framework with global and local factors to predict crisis returns, defining unexplained increases in factor loadings as indicative of contagion. We find evidence of systematic contagion from US markets and from the global financial sector, but the effects are very small. By contrast, there has been systematic and substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. Consequently, we reject the globalization hypothesis that links the transmission of the crisis to the extent of global exposure. Instead, we confirm the old “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis. JEL Classification: F3, G14, G15Contagion, country risk, current account, equity markets, factor model, financial crisis, financial policies, FX reserves, global transmission, market integration

Global Crises and Equity Market Contagion

Using the 2007-09 financial crisis as a laboratory, we analyze the transmission of crises to country-industry equity portfolios in 55 countries. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. We find statistically significant evidence of contagion from US markets and from the global financial sector, but the effects are economically small. By contrast, there has been substantial contagion from domestic equity markets to individual domestic equity portfolios, with its severity inversely related to the quality of countries’ economic fundamentals and policies. This confirms the old “wake-up call” hypothesis, with markets and investors focusing substantially more on country-specific characteristics during the crisis.

Absence of Metastable States in Strained Monatomic Cubic Crystals

A tetragonal (Bain path) distortion of a metal with an fcc (bcc) ground state will initially cause an increase in energy, but at some point along the Bain path the energy will again decrease until a local minimum is reached. Using a combination of parametrized tight-binding and first-principles LAPW calculations we show that this local minimum is unstable with respect to an elastic distortion, except in the rare case that the minimum is at the bcc (fcc) point on the Bain path. This shows that body-centered tetragonal phases of these materials, which have been seen in epitaxially grown thin films, must be stabilized by the substrate and cannot be free-standing films.Comment: 7 pages, 5 postscript figures, REVTEX, submitted to Phys. Rev.

Economic relations with regions neighbouring the euro area in the ‘euro time zone

This paper reviews the economic, monetary and financial relations between the EU and the euro area and a set of countries in a broad set of neighbouring regions. The 80 or so countries are mostly classified as transition, emerging or developing economies and belong to four main regions: the Western Balkans; the European part of the Commonwealth of Independent States; the Middle East and Northern Africa; and Sub-Saharan Africa. In many respects, these countries are diverse; however, some common features can also be identified. One of these common features is the fact that the euro area is their largest trading partner and the largest originator of international bank credit, foreign direct investment and official development assistance; meanwhile, from a euro area perspective, while these countries account for a somewhat smaller share of external trade, they are important as providers of energy, other raw materials and agricultural products.