Diffusion of crisis signals across the world: evidence from subprime crisis of 2008-2009

Abstract

Purpose The innovations in fundamentals coupled with noise traders induce co-movement in diverse markets. This co-movement in equity markets which is evidenced higher during the turmoil period influences economic fundamentals of a country dissimilar in nature. The purpose of this paper is to examine whether economic fundamentals or investors’ behavior attributable to disturbances across the world are the rationale behind the crisis transmission, and thereby distinguish fundamental-based contagion from investor-induced contagion. Design/methodology/approach Initially, the study investigates the role of macroeconomic fundamentals and stock returns on crisis occurrence using panel probit estimates. Additionally, ordinary least squares estimates controlling the influence of fundamentals on domestic return capture the discrete country effect measuring the influence of domestic as well as foreign economic fundamentals along with foreign returns on the domestic stock index. Findings The empirical results reveal that foreign country stock index returns are having a significant influence on domestic returns besides a prominent role in crisis occurrence. The binary probit model confirmed the influence of both macroeconomic factors and foreign returns in crisis occurrence. The OLS estimates found evidence for investor-induced contagion in the crisis period where the effects of economic fundamentals are small in comparison to foreign market returns that are mainly dominant in pre- and post-crisis period. Research limitations/implications The propagation of crisis from one market to other would enable the policy makers to make clear regulations at right time to control for the crisis in future. The results can help the policy makers as well as investors in reducing the impact of the crisis in future by clearly monitoring the behavior of the factors under study. Originality/value The current study addresses the role of macro fundamentals and investors influence in crisis propagation. Adopting subprime crisis of 2008-2009 as a reference point and separating the sample period into pre-crisis, crisis and post-crisis period, the study explains how badly the other 30 markets impacted the crisis that emerged in the USA.

Impact of Islamic Financial Literacy, Subjective Norms, Risk Perception and Perceived Behavioral Control on Adoption of Islamic Banking in Pakistan

“…In addition, therefore Islamic financial literacy has a strong relationship with AIB, and IFL also encourages individuals to take part in risky investments. (Rajan and Santhakumar, 2018). Therefore, a Hypothesis was developed: H1 High IFL positively affects the AIB.…”

Islamic Financial Literacy Index of Students: Bridging SDGs of Islamic Finance

“…For example, previous research has found that risk avoidance is correlated with religiosity (Breuer, Riesener & Salzmann 2014). Therefore, the stability of a high level of Islamic financial literacy will encourage individuals to make wise decisions (Rajan & Santhakumar 2018). This survey on Islamic banking knowledge found that while nearly all Muslims are only 27.3 percent of those who are aware of Islamic banks actually understand the differences between Islamic and conventional banks (Hamid & Nordin 2001;Bley & Kuehn 2004).…”

Transmission of shocks between Chinese financial market and oil market

“…Thus, investors change their expectations and transmit the shock through a propagation mechanism that does not exist during stable periods. Testing the propagation of shocks, Rajan and Santhakumar (2018) found that investors have induced contagion. Javaira and Hassan (2015) indicated the presence of a herding behavior among investors during the liquidity crisis in the Pakistani stock market.…”

“…Indeed, the herding behavior of investors during a context of information asymmetry induces markets to move together. Rajan and Santhakumar (2018) found that investors induce contagion in the crisis period. As a matter of fact, in this context, we consider the behavioral theory of contagion, referring to the investor's sentiment.…”