...THE SUBPRIME CREDIT CRISIS AND CONTAGION IN FINANCIAL MARKETS Francis A. Longstaff∗ Abstract. We conduct an empirical investigation into the pricing of subprime assetbacked CDOs and the resulting contagion effects on other markets. Using data for the ABX indexes of subprime CDO prices, we find strong evidence of contagion effects. In particular, we find that contagion effects spread first from lower-rated ABX indexes to higher-rated ABX indexes, and then from the subprime markets to the Treasury bond and stock markets. ABX index returns forecast stock and Treasury bond returns as much as three weeks ahead during the crisis. Furthermore, ABX index shocks are significantly related to contractions in the size of the short-term credit markets and increases in the trading activity of financial stocks over the next several weeks. These results provide support for the hypothesis that financial contagion was spread through liquidity and risk-premium channels. Current version: August 2008. UCLA Anderson School and NBER. I am very grateful for helpful discussions with Joshua Anderson, Vineer Bhansali, Bruce Carlin, Richard Clarida, Rajna Gibson, Rob- ert Gingrich, Hanno Lustig, Alfred Murata, Steve Schulist, and Jiang Wang, and for the comments of seminar participants at New York University, Pimco, and UCLA. All errors are my responsibility. ∗ 1. INTRODUCTION During the past year, financial markets have suffered catastrophic losses from the ongoing credit crisis. This crisis was initially...
Words: 10924 - Pages: 44
...stocks tumbled, and the euro currency reached 2-year lows. Nonetheless, Greece was not the only stressed economy in The Euro Zone, in fact, it turned out to be a tip of the iceberg since other nations in the European Union were trailing on the Same road. Spain, Italy, Portugal and Ireland had accumulated huge budget deficits as well as increased public debt to the Gross Domestic product ratios. Portugal had an economic boom that was being sustained by the significantly lower borrowing rates. Nevertheless, it was hit by expeditious wage inflation which adversely affected the local companies’ competition with other foreign firms (CAI and LI, 2012). The sovereign debt crisis in European region has raised utmost concern about the financial contagion from numerous quarters especially the media and the agencies charged with the duty of making monetary policies. The intrinsic fear about the ongoing sovereign debt crisis in Europe is that the act of default of a single sovereign country in the Eurozone would rapidly have spillover consequence that...
Words: 2386 - Pages: 10
...COLLEGE OF ECONOMIC AND MANAGEMENT SCIENCES DEPARTMENT OF BUSINESS MANAGEMENT An assignment submitted in partial fulfilment of the course: INT4801 (International Business) Assignment 03 Due Date: 09 October 2015 Table of Contents TABLE OF CONTENTS ..................................................................................................................................................... 1 QUESTION 1: CRITICALLY EVALUATE THE IMPORTANCE OF WORLD TRADE ORGANISATION (WTO) AS A REGULATORY BODY IN INTERNATIONAL TRADE ARRANGEMENTS. .................................................. 2 INTRODUCTION ......................................................................................................................................................................... 2 AGREED LIBERALIZATION ............................................................................................................... ERROR! BOOKMARK NOT DEFINED. RULE OF LAW.............................................................................................................................. ERROR! BOOKMARK NOT DEFINED. QUESTION 2: EXTENSIVELY ANALYSE THE RELEVANCE OF SUBSIDY AS AN INSTRUMENTS OF TRADE RESTRICTION, ESPECIALLY IN AGRICULTURE SECTOR. ................................................................... 9 INTRODUCTION ...........................................................................................................................................................
Words: 5530 - Pages: 23
...find that their frequency in recent decades has been double that of the Bretton Woods Period (1945-1971) and the Gold Standard Era (1880-1993), comparable only to the Great Depression. Nevertheless, the financial crisis that started in the summer of 2007 came as a great surprise to most people. What initially was seen as difficulties in the US subprime mortgage market, rapidly escalated and spilled over to financial markets all over the world. The crisis has changed the financial landscape worldwide and its costs are yet to be evaluated. The purpose of this paper is to concisely survey the literature on financial crises. Despite its severity and its ample effects, the current crisis is similar to past crises in many dimensions. In a recent series of papers, Reinhart and Rogoff (2008a, 2008b, 2009) document the effects of banking crises using an extensive data set of high and middle-to-low income countries. They find that systemic banking crises are typically preceded by credit booms and asset price bubbles. This is consistent with Herring and Wachter (2003) who show that many financial crises are the result of bubbles in real estate markets. In addition, Reinhart and Rogoff find that crises result, on average, in a 35% real drop in housing prices spread over a period of 6 years. Equity prices fall 55% over 3 ½ years. Output falls by 9% over two years, while unemployment rises 7% over a period of 4 years. Central government debt rises 86% compared to its pre-crisis level...
Words: 11555 - Pages: 47
...Ch5. Motivations and Emotion: Driving Consumer Behavior – Graded Quiz 1. Alexa gets lemonade for herself after a long walk on the beach, on a sunny day. This is an example of _____. a. regulation b. homeostasis c. self-actualization d. self-improvement B is Correct. This is an example of homeostasis. Homeostasis refers to the fact that the body naturally reacts in a way to maintain a constant, normal bloodstream. It is the state of equilibrium wherein the body naturally reacts in a way to achieve this. See 5-1: What Drives Human Behavior? 2. ADC Inc. claims that the anti-virus software produced by it helps block all forms of software viruses that are harmful to computers. This implies that ADC Inc. appeals more to those with a(n) _____ focus. a. self-actualization b. self-improvement c. prevention d. promotion C is Correct. ADC's claim suggests that it appeals more to those with a prevention focus. A prevention focus orients consumers toward avoiding negative consequences, while a promotion focus orients consumers toward the opportunistic pursuit of aspirations or ideals. See 5-1: What Drives Human Behavior?. 3. According to Maslow's hierarchy of needs theory, the physiological needs refer to the: a. need to be recognized as a person of worth. b. need to feel like a member of a family or community. c. needs for basic survival. d. needs of security and protection. C is Correct. Maslow's hierarchy of needs theory...
Words: 1185 - Pages: 5
...Othman Yeop Abdullah Graduate School of Business Graduate Universiti Utara Malaysia BDFM 7053 GLOBAL ECONOMIC THEORY AND ISSUES UUM-Rezzen KL Third Semester May Session 2013/2014 Prof Dr. K. Kuperan Viswanathan SHORT PAPER #1 INTERDEPENDENCE OF WORLD FINANCIAL MARKETS AND FOREIGN EXCHANGE FLUCTUATIONS Submitted by: ZAHARIN BIN ALI MATRIC No. 95906 June 14, 2014 Short Paper #1 Page |2 1. INTRODUCTION With the increase in advancements in transportation and communications made possible by technology, the world has seen exponential growths in economic ties among all nations. In the last few decades, globalization has resulted in a rapid surge in the interchanging of goods and services reaching across further and faster beyond national borders, whilst increasing the interconnectedness of different markets and cultures. These economic ties come in the forms of international trade, foreign direct investment and monetary integration, made possible with the complementary increase in the interdependence of international financial markets. With further liberalization and deregulation, financial market interdependence grew in momentum alongside the worldwide capital mobilization. This growing interconnectedness of all the world financial markets and the degree of their interdependence have themselves created a subject of substantial interest among economists. The recent global financial crisis has only elevated this interest further, as the impact of U.S. subprime...
Words: 4027 - Pages: 17
...The Quarterly Review of Economics and Finance 45 (2005) 48–64 Contagion effects of the world’s largest bankruptcy: the case of WorldCom Aigbe Akhigbea,∗ , Anna D. Martinb , Ann Marie Whytec a Department of Finance, College of Business Administration, University of Akron, Akron, OH 44325, USA b Department of Finance, Charles F. Dolan School of Business, Fairfield University, USA c Department of Finance, School of Business, University of Central Florida, USA Received 16 June 2003; received in revised form 23 December 2003; accepted 27 July 2004 Available online 26 November 2004 Abstract On July 19, 2002 WorldCom sought protection from its creditors when it filed for Chapter 11 bankruptcy, earning the distinction as the largest bankruptcy filing in U.S. history. The events surrounding this history-making occurrence provide an important opportunity to examine the repercussions for WorldCom’s stakeholders. We especially focus on the valuation effects of the WorldCom failure on exposed financial institutions for their important monitoring roles as institutional investors and creditors. Despite the heightened uncertainty facing investors during this period, we find that the market is remarkably efficient in distinguishing among the various types of stakeholders. In particular, institutional investors and creditors are largely unaffected by the events, which is expected based on the benefit of diversification. In contrast, large and key competitors are adversely affected by the events...
Words: 8815 - Pages: 36
...order to determine this, researchers would need to gain consent and records from families, local law enforcement, and school officials. These juveniles should not be informed of the previous offenses of the delinquent member, as this could lead to potential conflict within the group, mitigating any positive effect the therapy would have. The group itself will be organized as a standard after-school activity group with adult supervision. The purpose of the adult supervision is to control and potentially mitigate the effects of unsupervised peer contact between the delinquent and non-delinquent adolescents. This is due to previous research that had concluded that unsupervised peer contact actually leads to an increase in delinquency (Gonzalez & Dodge, 2010 p 28). As a result, the group would be supervised and directed by adults and would be structured in order to reduce the effects a lack of supervision could have. Since peer influence has a higher effect on how adolescents act, a program such as the one described should theoretically lead to delinquent...
Words: 693 - Pages: 3
...Organizational Behavior and Human Decision Processes Vol. 86, No. 1, September, pp. 99–130, 2001 doi:10.1006/obhd.2001.2974, available online at http://www.idealibrary.com on Mood and Emotions in Small Groups and Work Teams Janice R. Kelly Purdue University and Sigal G. Barsade Yale University Affective influences abound in groups. In this article we propose an organizing model for understanding these affective influences and their effects on group life. We begin with individuallevel affective characteristics that members bring to their groups: moods, emotions, sentiments, and emotional intelligence. These affective characteristics then combine to form a group’s affective composition. We discuss explicit and implicit processes through which this affective combination occurs by examining the research on emotional contagion, entrainment, modeling, and the manipulation of affect. We also explore how elements of the affective context, such as organizationwide emotion norms and the group’s particular emotional history, may serve to constrain or amplify group members’ emotions. The outcome, group emotion, results from the combination of the group’s affective composition and the affective context in which the group is behaving. Last, we focus on the important interaction between nonaffective factors and affective factors in group life and suggest a possible 2001 Academic Press agenda for future research. During the past century, a tremendous amount of research attention...
Words: 15106 - Pages: 61
...Unethical Use of User Data for Social Experimentation Bonita V. Earls Longwood University Abstract His paper explores the ethical impact of Facebooks 2012 study on emotional contagion in a social web environment. The study is controversial due to the fact Facebook researchers failed to follow standard ethical guidelines as set forth in the healthcare industry, failed to clearly communicate the study, its intentions, and methodology to its users, and manipulated data in such a way it invoked emotional and mood changes of its unaware users. The idea of algorithmic program use in the social media sphere comes into question as well. Introduction In January 2012, the news feeds of approximately 700,000 users of the popular social media site, Facebook, were manipulated in a manner so that some of its users only had positive news stories show up on their pages and others had only negative news stories show up. The experiment was conducted over the span of a week, from the 11th to the 18th, without the knowledge of the users (Kramer, 2014). According to the researchers, the goal was to see if “emotional contagion” occurs without direct interaction between people and in the absence of nonverbal cues. By manipulating the news stories, either all positive or all negative, they could study what effects, if any, there was on the moods of the users (LaChance, 2014). This is only one of many social experiments that the Facebook Core Data Science Team, has performed since 2008 when...
Words: 3902 - Pages: 16
...Thomas L Friedman’s The World is Flat In Thomas L. Friedman TheWorld is Flat he explains the new “flat” playing field of world business created by a combination of technology and intertwined economies. In addition he notes that this global leveling can be both positive and detrimental. Evidence of one of the more detrimental effects of flattening is easy to view in the recent crisis of the Greek economy and its effect on the global economy. Greece is one of the smallest economies in Europe, however between the technological ease of information of the Greek economies woes being broadcasted incessantly and the interdependency of the European and other world markets, what was once a regional concern about the amount of debt amassed by a small economy has rapidly turned into a worldwide economic contagion. “Worries that over indebted Greece could default sent investors scouring for the next ticking debt bomb. The euro zone has quite a selection to choose from: Portugal, Italy, Ireland and Spain, which, along with Greece, form the aptly nicknamed PIIGS. Yields on the sovereign bonds of Portugal and Spain have already risen, a sign that investors believe holding their debt is becoming riskier.” (Schuman, http://www.time.com/time/magazine/article/0,9171,1987598,00.html) Greece’s economic turmoil combined with other EU member states poised to default has caused a global unease that endangers the recovery of the United States market as well. The U.S. was finally seeing...
Words: 472 - Pages: 2
...sacrifices. Q3) How did the crisis originate in Greece? Ans. Greece had a very liberal social security program for its citizens. Govt aided healthcare, education, pensions etc. which were heavily subsidised as the Greek Govt was bearing the major part of the expenditure. The Greek Govt went on a borrowing spree to finance its expenditure leading to the current debt position which looks unsustainable. It is feared that there will soon be a contagion effect. Q4) What is the contagion effect? Ans. Contagion is derived from the word “contagious” which means to spread. The worry is that this alarming situation would spread to soon other Euro regions leading to many sovereign defaults. Already pain is being felt in Italy and Spain as of late their borrowing costs have substantially increased. Q5) Why is any crisis by Italy and Spain particularly worrying? Ans. Any crisis in Italy and Spain is expected to have serious global effects as they are comparatively bigger economies. Also any defaults by Italy & Spain would have disastrous effects as a large number of French, German, British banks...
Words: 952 - Pages: 4
...The idea of suicide contagion is similar to the social multiplier theory; however, instead of it effecting only a few individuals, it can having a tidal wave effect and cause a significant rise in suicides (Becker et al., 2004). Newspaper and television reporting have caused the risk of the suicide contagion effect to increase dramatically. Stack (2003) “showed that studies measuring the effect of a suicide story involving an entertainment or political celebrity were 14.3 times more likely to find a copycat effect. (pp.111-112)” Research suggests that the inadvertent romanticizing of suicide may be encouraging others to identify with the victim and in turn commit the act themselves (Becker et al., 2004). The World Wide Web has also been shown...
Words: 337 - Pages: 2
...connection allows us to affect everyone we interact with both physically and mentally. The new science of social intelligence should be thought of in terms of being intelligent not just about our personal and professional relationships, but also in them. Goleman explains that this involves expanding our focus in a way that looks beyond the individual to understand what really occurs when people interact, and to look beyond narrow self-interest to the best interests of others as well. Emotional Economy The realization that one person can trigger an emotion in another person or vice versa represents the powerful mechanism by which feelings are disseminated to others. Goleman classifies this as emotional contagion which is the emphasis of emotional economy. Emotional contagion comes in two forms; low road and high road. The low road is mental circuitry that operates in our subconscious at a very fast rate and tends to involve impulsive decision-making. The high road consists of mental circuitry that operates at the conscious level and is more structured, requires deliberate effort and tends to involve rational decision-making. Rapport Goleman conveys that one of the most basic, but important aspects of relationships involves rapport. He explains that rapport only exists between people and we see it when an interaction with another feels pleasant, engaged, and smooth. These initial feelings pass quickly, but...
Words: 3609 - Pages: 15
...two years later, its devastating effects are still being felt as the government continues to struggle with the bailout to stabilize the financial system, mitigate contagion risk, and resolve the CLICO crisis. Even one year after the bailout, there was still no resolution of the crisis. In view of the intractable nature of the CLICO collapse, the People’s Partnership government that came to power on May 24, 2010 established a commission of enquiry to investigate the causes of CLICO’s collapse, the scope of the MOU, the cost of the bailout, and the failure to provide a bailout to the Hindu Credit Union (HCU) that collapsed in 2008. There are many questions that are still unanswered. What were the root causes of CLICO’s collapse? What corporate governance structures and practices precipitated the collapse? Did the bailout create moral hazard? Who or what was to blame for the collapse? What action has the government taken to date? What lessons have been learnt and, more importantly, how can this situation be prevented from being repeated in the future? This concept paper examines these questions, analyzes the evidence to find answers, and in the conclusion, suggests ways to improve corporate governance and the empowerment of regulators to provide competent regulatory oversight and enforcement. Key words: financial collapse, bailout, corporate governance, moral hazard, political influence, risk management Introduction The devastating effects of the corporate collapse of Colonial...
Words: 8128 - Pages: 33
