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FINANCIAL CONTAGION ON THE INTERNATIONAL TRADE NETWORK
Author(s) -
KALI RAJA,
REYES JAVIER
Publication year - 2010
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2009.00249.x
Subject(s) - social connectedness , financial contagion , interdependence , financial crisis , shock (circulatory) , economics , financial networks , systemic risk , financial system , financial market , finance , business , financial economics , macroeconomics , medicine , psychology , political science , law , psychotherapist
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 )