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Financial Stress, Regime Switching and Spillover Effects: Evidence from a Multi-Regime Global VAR Model

Author

Listed:
  • Pu Chen

    (Melbourne Institute of Technology, Australia)

  • Willi Semmler

    (Department of Economics, New School for Social Research)

Abstract

The globalization process leads to increasing synchronization of business cycle among different countries. As a consequence, many policy makers and Central Banks are afraid of vulnerabilities of their country arising from exter- nal risk drivers. In this paper we develop a multi-regime global VAR model to study the spill-over effects in financial markets, in goods markets and between financial markets and good markets across countries, which are assumed to be in a high financial stress regime or a low financial stress regime. It turns out that in both high and low stress regimes financial shocks to a country, big or small one, can have large and persistent impacts on financial markets of other countries, and only in the high stress regime financial shocks to a country can have some negative output effects on other countries. In high stress regime output shocks of a big country can have larger effects on finan- cial stress than those of a small country, while in a low stress regime output shocks of a country, big or small, have little impact on financial conditions. Further, we study the effects of global and regional shocks, as well as the spillover effects of national monetary policies and internationally coordinated policies on the financial and real sectors.

Suggested Citation

  • Pu Chen & Willi Semmler, 2017. "Financial Stress, Regime Switching and Spillover Effects: Evidence from a Multi-Regime Global VAR Model," Working Papers 1708, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1708
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    References listed on IDEAS

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    Cited by:

    1. Yao, Xiaoyang & Le, Wei & Sun, Xiaolei & Li, Jianping, 2020. "Financial stress dynamics in China: An interconnectedness perspective," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 217-238.
    2. Hoque, Mohammad Enamul & Soo-Wah, Low & Tiwari, Aviral Kumar & Akhter, Tahmina, 2023. "Time and frequency domain connectedness and spillover among categorical and regional financial stress, gold and bitcoin market," Resources Policy, Elsevier, vol. 85(PA).
    3. Stolbov, Mikhail & Shchepeleva, Maria & Karminsky, Alexander, 2022. "When central bank research meets Google search: A sentiment index of global financial stress," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    4. Zhang, Hongwei & Wang, Peijin, 2021. "Does Bitcoin or gold react to financial stress alike? Evidence from the U.S. and China," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 629-648.
    5. Ozcelebi, Oguzhan, 2020. "Assessing the impacts of financial stress index of developed countries on the exchange market pressure index of emerging countries," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 288-302.
    6. Dong, Xiyong & Li, Changhong & Yoon, Seong-Min, 2020. "Asymmetric dependence structures for regional stock markets: An unconditional quantile regression approach," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    7. Dong, Xiyong & Song, Li & Yoon, Seong-Min, 2021. "How have the dependence structures between stock markets and economic factors changed during the COVID-19 pandemic?," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    8. Kangogo, Moses & Volkov, Vladimir, 2022. "Detecting signed spillovers in global financial markets: A Markov-switching approach," International Review of Financial Analysis, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    International contagion; spillover effects; regime dependency; regime switching; Multi-Regime Global VAR;
    All these keywords.

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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