Fannie Mae and Freddie Mac, Bear Stearns, Lehman Brothers: As the major dominoes of the financial sector continue to fall at an alarming rate and the Federal Reserve attempts to forestall a systemic meltdown of the domestic financial network, University of Arkansas economists find that a network approach to the study of financial “contagion” – the transmission and impact of financial crises – may be applied to understand the current turmoil in the U.S. banking sector and the need for a systemwide response by the Fed.
A new study by Raja Kali and Javier Reyes, economics professors in the Sam M. Walton College of Business at the University of Arkansas, reveals that integration in the global financial network is a double-edged sword. On one hand, being well connected to the network can make a country more vulnerable to systemic shocks. However, this same connectedness also is associated with an increased ability to dissipate economic shocks to the system. Kali and Reyes reached these conclusions by studying how international financial crises travel though the network of global trading relationships.
Over the past decade, economists focusing on globalization and international trade have debated why financial crises – the Mexican Tequila crisis of 1994 and the Asian flu crisis of 1997, for example – spread financial contagion, while other crises had less impact. Drawing on recent advances in the study of networks, Kali and Reyes developed a new method to better explain various countries’ stock market performance in the wake of financial crises.
The researchers constructed novel network-based measures of connectedness – that is, the extent to which a country is integrated into the global trading system – and found that crises in “epicenter” countries – countries in which crises originated – were amplified if the country was better integrated into the trade network. On the other hand, “target” countries affected by these financial shocks were better able to cushion the impact of the crises if they too were well integrated into the global trading network.
Previous attempts to explain the transmission of global financial crises focused on bilateral trade relationships. Having applied the study of networks in other research projects, Kali and Reyes thought that a systemwide perspective might better explain financial contagion and the impact of crises.
Starting with the simple question, “Does integration into the international trade network make a country more vulnerable to financial crises?” Kali and Reyes used international trade data to map a global trading system as an interdependent complex network that ties countries around the world together as a whole. The trade-flow data allowed the researchers to construct a complete global network of linkages connecting 182 countries.
“Underlying this approach is the assumption that the structure of the international trade network functions as meaningful economic linkages between countries,” Reyes said. “In this spirit, we assumed the network of international trade linkages to be the backbone that underpins and motivates trade and financial flows of various kinds between countries.”
The pattern of international trade linkages allowed the researchers to obtain important indicators of country-level integration or connectedness. In their analysis, Kali and Reyes developed several distinct measures of this connectedness to the global trading system.
One measure, called “node importance,” is an index of network dependency in which some countries are defined as more important if other countries, which are also important within the network, depend on them. A country that was more important according to this measure was likely to have a greater influence on the network if it was affected by an adverse shock. A second indicator is “node centrality,” which demonstrates how central a given country is by measuring how similar it is to a perfect node, which would be a country linked to every other country.
Kali and Reyes applied these indicators to analyze five non-overlapping global financial crises – the so-called Mexican Tequila crisis, the Asian flu crisis, the Russian virus and crises in Argentina and Venezuela. They found that the network effect of the crisis epicenter country was substantially higher for the Tequila, Asian flu and Russian virus crises than for the Venezuelan and Argentine crises. In other words, Venezuela and Argentina were revealed as poorly connected target countries.
“Better connected target countries like the United States, Canada and Italy can dampen the negative effects of shocks originating in other countries,” Kali said, “while less connected countries like Ecuador, India and Venezuela cannot.”
The researchers’ study, titled “Financial Contagion on the International Trade Network,” will be published soon in Economic Inquiry.Raja Kali, associate professor of economics
Matt McGowan | Newswise Science News
Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)
Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO
Whether you call it effervescent, fizzy, or sparkling, carbonated water is making a comeback as a beverage. Aside from quenching thirst, researchers at the University of Illinois at Urbana-Champaign have discovered a new use for these "bubbly" concoctions that will have major impact on the manufacturer of the world's thinnest, flattest, and one most useful materials -- graphene.
As graphene's popularity grows as an advanced "wonder" material, the speed and quality at which it can be manufactured will be paramount. With that in mind,...
Physicists at the University of Bonn have managed to create optical hollows and more complex patterns into which the light of a Bose-Einstein condensate flows. The creation of such highly low-loss structures for light is a prerequisite for complex light circuits, such as for quantum information processing for a new generation of computers. The researchers are now presenting their results in the journal Nature Photonics.
Light particles (photons) occur as tiny, indivisible portions. Many thousands of these light portions can be merged to form a single super-photon if they are...
For the first time, scientists have shown that circular RNA is linked to brain function. When a RNA molecule called Cdr1as was deleted from the genome of mice, the animals had problems filtering out unnecessary information – like patients suffering from neuropsychiatric disorders.
While hundreds of circular RNAs (circRNAs) are abundant in mammalian brains, one big question has remained unanswered: What are they actually good for? In the...
An experimental small satellite has successfully collected and delivered data on a key measurement for predicting changes in Earth's climate.
The Radiometer Assessment using Vertically Aligned Nanotubes (RAVAN) CubeSat was launched into low-Earth orbit on Nov. 11, 2016, in order to test new...
A study led by scientists of the Max Planck Institute for the Structure and Dynamics of Matter (MPSD) at the Center for Free-Electron Laser Science in Hamburg presents evidence of the coexistence of superconductivity and “charge-density-waves” in compounds of the poorly-studied family of bismuthates. This observation opens up new perspectives for a deeper understanding of the phenomenon of high-temperature superconductivity, a topic which is at the core of condensed matter research since more than 30 years. The paper by Nicoletti et al has been published in the PNAS.
Since the beginning of the 20th century, superconductivity had been observed in some metals at temperatures only a few degrees above the absolute zero (minus...
16.08.2017 | Event News
04.08.2017 | Event News
26.07.2017 | Event News
18.08.2017 | Life Sciences
18.08.2017 | Physics and Astronomy
18.08.2017 | Materials Sciences