Financial Contagion on the International Trade Network

Abstract

"We combine data on international trade linkages with a network approach to map the global trading system as an interdependent complex network. This enables us to obtain indicators of how well connected a country is into the global trading system. We use these network-based measures of connectedness to explain stock market returns during recent episodes of financial crisis. We find that a crisis is amplified if the epicenter country is better integrated into the trade network. However, target countries affected by such a shock are in turn better able to dissipate the impact if they are well integrated into the network. A network approach can help explain why the Mexican, Asian, and Russian financial crises were highly contagious, while the crises that originated in Venezuela and Argentina did not have such a virulent effect. We suggest that a network approach incorporating the cascading and diffusion of interdependent ripples when a shock hits a specific part of the global trade network provides us with an improved explanation of financial contagion." ("JEL" F10, "F36", F40, "G15") Copyright (c) 2009 Western Economic Association International.

Is full banking integration desirable?

“…However, more recent contributions argue that, when measuring integration, it is relevant not only to consider the concept of openness but also the idea of connectedness. In this regard, Fagiolo et al (2010b), Kali and Reyes (2010) or Chinazzi et al (2013) adopt approaches based on network analysis to model the World Trade Web (WTW) as well as its financial counterpart-i.e., the international financial network or, more specific to our goals, the global banking network (Minoiu and Reyes, 2013). The ideas on which they are based were partly inspired by the influential seminal work of Allen and Gale (2000), but these approaches to measure the integration of banking and financial markets have recently been gaining more importance (Chinazzi et al, 2013;Minoiu and Reyes, 2013;Elliott et al, 2014;Hautsch et al, 2014;Garratt et al, 2014;Minoiu et al, 2015;Caballero, 2015;Berardi and Tedeschi, 2017), together with approaches considering connectedness among financial institutions in general (Billio et al, 2012;Drehmann and Tarashev, 2013).…”

“…One variant of these approaches focused on the particular case of financial integration would include, among others, McGuire andTarashev (2006), von Peter (2007), Kali and Reyes (2010), Fagiolo et al (2010b), Minoiu and Reyes (2013), and Chinazzi et al (2013). These types of approaches are implicitly measuring de facto financial (or banking) integration.…”

Post-mortem examination of the international financial network

“…The OLS cross-sectional regression of a crisis indicator on a parsimonious list of covariates, where the dataset is built around a crisis window period, intends to assess if during a period of financial distress the position of a country within the network affects its performance, either by providing ways to diffuse/assimilate shocks, or by making the country prone to contagion (Kali and Reyes, 2010).…”

A microscopic study of the fitness-dependent topology of the world trade network

“…Others [11,6,25,3] investigate correlation structures of income, connectivity and interaction strength in weighted networks and illustrate that an involvement in international trade has a direct impact on income and vice versa. Additionally, it has been shown that network properties have good explanatory power to detect vulnerable economies in the WTN [26,27]. This paper is organised as follows.…”