This article examines contagion and crisis propagation (spillovers) in the Gulf Cooperation Council (GCC) economies over the period 1960 to 2002. It also examines whether contagion occurred in Saudi Arabia (large country) after the 1987 US stock market crash and the 1997 Thai exchange rate devaluation and whether these contagion shocks spillover to smaller countries of the region. Spillovers are likely to occur among interdependent countries within the same geographical region. Tests based on correlation coefficients, ARCH/GARCH estimates and direct change (generalized least squares regression) propagation effects indicate that contagion from the US stock market crash and the Thai devaluation occurred in Saudi Arabia, and these external shocks were propagated to smaller GCC countries. This suggests that GCC countries are likely to mitigate such propagations through economic integration. Thus, the idea of GCC formation may help insulate Gulf economies against crisis propagation.
US interest rate volatility and contagion effects (propagation of crises) are investigated using GARCH equations over the period 1993.01-1998.12. The period includes two main financial crises: the 1994 Mexican peso crisis and the 1997 Japanese yen crisis. Contagion is more likely to occur in cointegrated markets with available open channels. The purchasing power and interest parities' channels suggest that the domestic inflation rate reflects some influence of the foreign exchange rate. The results indicate that, although the bulk of the US interest volatility is idiosyncratic, spillovers from Mexican exchange rate changes are more likely to induce contagion effects on US interest rates than Japanese exchange rates, possibly because of increased capital flows after NAFTA. Further, unlike the floating rate of Japan, the Mexican fixed exchange rate encourages international capital flows.
This article adopts a new technique, developed by Hurlin (2004), to test for Granger causality between capital structure and corporate operating characteristics including time-invariant, firm-specific effects in heterogeneous panel data from five US industries over the period 1980 to 2002. Previous studies addressed the issue of whether corporate operating characteristics cause changes in capital structure while our study focuses on the causal linkages between capital structure and corporate operating characteristics. For robustness, we validated the results using the Mixed Fixed Random (MFR) technique developed by Nair-Reichert and Weinhold (2001). The results indicate that causality test is more revealing than correlation-based analyses. It is clear that capital structure theories are co-existent in different industries. The study provides ample evidence that simultaneity between corporate operating characteristics and capital structure is prevalent with differential results in different industries and forms of debt.
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