FINANCIAL CONTAGION ON THE INTERNATIONAL TRADE NETWORK |
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| Authors: | RAJA KALI JAVIER REYES |
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| Institution: | 1. Kali: Associate Professor, Department of Economics, Sam M. Walton College of Business, University of Arkansas, Fayetteville, AR 72701. Phone 1‐479‐575‐6219, E‐mail rkali@walton.uark.edu;2. Reyes: Associate Professor, Department of Economics, Sam M. Walton College of Business, University of Arkansas, Fayetteville, AR 72701. 1‐479‐575‐6079, E‐mail jreyes@walton.uark.edu;3. We are grateful to Jon Johnson, Jungmin Lee, two anonymous referees, and the editor for comments that improved the article. We thank seminar participants at the Harvard Business School, the University of Arkansas, and the 2008 CIBIF conference in Groningen for their comments. Viktoria Riiman provided outstanding research assistance. |
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| 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) |
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