Investigating liquidity constraints as a channel of contagion: a regime switching approach

Abstract

The present study investigates the timing and repercussion of the subprime crisis of 2008–09 in a regime-switching model. The interdependence and co-movement of financial markets in different countries has been enhanced due to the globalization of international trade, and investment trends can spread globally as a result of investors owning international portfolios. This study uses a regime-switching model to illustrate the timing of the crisis regime and calm regime for United States (US) stock index returns and the corresponding impact on Indian stock index returns. The Indian stocks investigated are classified into “remote” and “reachable” stocks, and different effects are found for these two types. It is found that shocks originating in the US can be transferred to the Indian reachable market as a result of foreign investors. There is, however, a less persistent impact on remote stocks. Accordingly, the study contributes to the literature on the material impacts of the crisis resulting from liquidity constraints and fear of contagion among investors.

Volatility contagion between cryptocurrencies, gold and stock markets pre-and-during COVID-19: evidence using DCC-GARCH and cascade-correlation network

“…Cryptocurrencies are controversial, with some policymakers and scholars regarding them as a disruptive technology with both benefits and drawbacks; this study contributes to the ongoing debate about their role in the global financial system. While cryptocurrencies have the potential to revolutionize payment systems and foster innovation, they also pose risks to national security, financial stability, and consumer protection, as documented in previous research (Fratrič et al 2022;Guesmi et al 2019;Haykir and Yagli 2022;Özdemir 2022;Qarni and Gulzar 2021;Shahzad et al 2021;Sruthi and Shijin 2020). This study examines the dynamics of volatility contagion between cryptocurrencies and traditional financial assets such as gold and stock indices to shed light on interdependencies and transmission channels among these markets and guide investment strategies and policy interventions.…”