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This paper proposes to measure the spillover effects that cross liabilities generate on the magnitude of default in a system of financially linked institutions. Based on a simple model and an explicit criterion—the aggregate debt repayments—the measure is defined for each institution, affected by its characteristics and links to others. These measures—one for each institution—summarize relevant information on the interaction between the liabilities structure and the shocks to resources, and they can be useful to determine optimal intervention policies. The approach is illustrated to evaluate the consolidated foreign claims of 10 European Union countries. This paper was accepted by Amit Seru, finance .

This paper studies the US and global economic fundamentals that exacerbate emerging stock markets volatility and can be considered as systemic risk factors increasing financial stability vulnerabilities. We apply the bivariate HEAVY system of daily and intra-daily volatility equations enriched with powers, leverage, and macro-effects that improve its forecasting accuracy significantly. Our macro-augmented asymmetric power HEAVY model estimates the inflammatory effect of US uncertainty and infectious disease news impact on equities alongside global credit and commodity factors on emerging stock index realized volatility. Our study further demonstrates the power of the economic uncertainty channel, showing that higher US policy uncertainty levels increase the leverage effects and the impact from the common macro-financial proxies on emerging markets’ financial volatility. Lastly, we provide evidence on the crucial role of both financial and health crisis events (the 2008 global financial turmoil and the recent Covid-19 pandemic) in raising markets’ turbulence and amplifying the volatility macro-drivers impact, as well.

This paper analyses the determinants of the changes in the non-performing loan (NPL) ratio in selected European emerging markets. The model was estimated on a panel dataset using a fixed effects estimator for seven Central and Eastern European (CEE) countries between Q3:2007 and Q3:2012. The countries analyzed are Bulgaria, Croatia, Czech Republic, Hungary, Latvia, Romania and Slovakia. Although the literature on NPLs is quite extensive, this is the first empirical research on the countries of CEE region using aggregate, country-level data on problem loans. The results suggest that the primary cause of high levels of NPLs is the economic slowdown, which is evident from statistically significant and economically large coefficients on GDP, unemployment and the inflation rate.

We investigate the consequences of overleveraging and the potential for destabilizing effects arising from financial- and real-sector interactions. In a theoretical framework, we model overleveraging and demonstrate how a highly leveraged banking system can lead to unstable dynamics and downward spirals. Inspired by models developed by Brunnermeier, Sannikov and Stein, we empirically measure the deviation-from-optimal-leverage for a sample of large EU banks. This measure of overleveraging is used to condition the joint dynamics of credit flows and macroeconomic activity in a large-scale regime change model: a Threshold Mixed-Cross-Section Global Vector Autoregressive (T-MCS-GVAR). The regime-switching component of the model is meant to make the relationship between credit and real activity dependent on the extent to which the banking system is overleveraged. We find significant nonlinearities as a function of overleverage. The farther the observed leverage in the banking system from optimal leverage, the more detrimental is the effect of a deleveraging shock on credit supply and economic activity.

Developing industrial linkages as spatial binding forces has become crucial for improving firms’ productivity. This paper examines the impacts of the adoption of forward and financial linkages on the vertical integration and performance of textile and garment firms in Egypt. This study uses a sample of 1020 micro-, small-, and medium-sized enterprises, employing propensity score matching to mitigate the endogeneity bias caused by the self-selection problem in adopting industrial linkages. Inverse-probability-weighted regression adjustment is applied as a doubly robust estimator to quantify the impact. The results confirm the positive impact of forward linkage on total factor productivity (TFP). We also found that financial linkage positively affects labor productivity, TFP, and vertical integration, while its impact on exports was marginal. Adopting financial linkage can increase the value-added per labor by 11–13 thousand Egyptian pounds and increase vertical integration by 13 percentage points. Industrial linkages have not realized an impact on exports in the current market structure; however, extending financial linkage works as an alternative to mitigating financial constraints. We underscore the significance of the policy that fosters forward and financial linkages to induce vertical integration and productivity growth.

Objective: This study investigates the effects of monetary policy interventions in Central and Eastern European (CEE) economies on shifts in financial market linkages during the Covid-19-induced crisis. We explore the market reaction to both standard and non-standard (e.g., quantitative easing) monetary policy announcements by cen- tral banks in Czechia, Hungary, Poland, and Romania, and analyse the way they affected sovereign bond and stock market linkages. The analysis is further extended to include international spill-over effects. Research Design Methods: We first quantify a set of time-varying asset correlations using asymmetric generalised DCC-GARCH models and daily data on financial asset returns. Going beyond the domestic stock-bond interdependencies, we explore cross-border connectedness between CEE economies, Germany, and the US. Next, we investigate the effects of detailed central bank announcements, as they un- folded during the Covid-19 crisis. Findings: We find that, by and large, the CEE central bank interventions conducted in 2020 alleviated domestic and cross-border pressures in financial market linkages triggered by the global risk shock, such as contagion and flight-to-safety effects. However, monetary policies had largest impact at the height of the crisis when central banks in the region introduced substantial interest-rate cuts and unconventional measures, which were used by those banks for the first time or on such a wide scale. Implications Recommendations: Our results imply that monetary authorities may partly mitigate the trans- mission of global shocks to domestic financial markets, even when it comes to small open economies. How- ever, the effects of monetary policies proved strongest at the onset of the crisis and seem to have been related to unconventional policy tools and aggressive interest rate cuts. Contribution Value Added: We examinee linkages across the two largest asset classes, sovereign bonds and equities, both within CEE economies and between each of them and Germany and the US (traditionally perceived as safe havens), while controlling for potential structural breaks, global risk measures, and Covid-19-related indi- cators, such as the number of Covid-19 cases and the government-response stringency indices. Event studies conducted in the article are based on a comprehensive dataset on policy interventions launched during 2020.

Affected by the small scale of forest farmers’ land and the imperfect development of the forest land transfer market, China’s forest rights mortgage loans have suffered from more serious credit rationing. The application of financial linkage theoretically has the effect of solving credit rationing. However, previous studies on financial linkages have focused on the field of credit lending, whereas the applied studies in the field of mortgage lending are mainly case studies on transaction models, and empirical tests on the application of financial linkages in mortgage lending are lacking. Therefore, to fill this gap, this study analyzed the effect of financial linkage on credit rationing for forestry mortgage loans and the mechanism of action through a study of farmers in Fujian, one of the key collective forestry areas in China, using the PSM method with 785 sample values. The results show the following: (1) Financial linkages have a significant mitigating effect on supply rationing, demand rationing, and the total rationing of forest rights mortgage loans. Compared to non-participation, financial linkages significantly reduced total rationing by 15.2%, with a 5% reduction in supply rationing and a 10.2% reduction in demand rationing. (2) The impact of financial linkage differs significantly among heterogeneous farmers. It has a significant mitigating effect on supply rationing for small-scale farmers, but not for large-scale farmers; meanwhile, it better mitigates demand rationing for large-scale farmers than for small-scale farmers. (3) In the mechanistic test, financial linkages were found to moderate the relationship between the value of collateral and supply rationing for small-scale farmers, and transaction costs play an intermediary role in the relationship between financial linkages and demand-based rationing. According to the study results, in order to promote the development of forest rights mortgage loans, it is necessary to develop different lending strategies for heterogeneous farmers, to further encourage small- and medium-sized farmers to participate in financial linkages, as well as to further reduce the related transaction costs.

This study attempts to develop a financial vulnerability indicator serving as a composite indicator for the state of financial vulnerability. The indicator was constructed from 10 variables of macroeconomic, financial and property market by extracting a common vulnerability component through the dynamic approximate factor model. On the feedback and amplification effects, the outcome revealed that financial vulnerability shock catalysed significant negative effects on economic activity in a high-vulnerability regime, while the impact was negligible in periods of low vulnerability. This study highlighted the usefulness of composite indicators as an early warning mechanism to gauge vulnerabilities in the Malaysian financial system.

Purpose The purpose of this paper is to test the dynamic linkages among the stock markets of four South Asian countries (India, Pakistan, Bangladesh and Sri Lanka) in the backdrop of trade interdependency. Design/methodology/approach Listed indices are used to serve the proxy of stock markets of four countries for the period: January 2000–December 2018. The study uses the autoregressive distributed lag model and Granger causality techniques in multivariate frameworks while focusing on intraregional trade as an exogenous factor for testing the long- and short-run causality in the given data set, hence raising the quality of statistical inference. Findings The results highlight that India and Pakistan are net exporters to the South Asian region, while Bangladesh and Sri Lanka are net importers from the region. While testing the stock markets linkages, the expanded intraregional trade volumes (exports plus imports) have occurred with the significant cointegration of stock markets of India and Pakistan with the other stock markets in the long run. In the short run, the stock markets of India, Pakistan and Sri Lanka report bidirectional causality without having significant spillovers of intraregional trade on the stock prices. Research limitations/implications The study relies on the multivariate techniques with stock prices and regional trade share as the exogenous variables. Further the regulatory, political and economic conditions of sample countries are fundamentally different which in turn affect their degree of trade interdependency and integration between the stock markets. Practical implications Nonsignificant cointegration of the stock markets of Sri Lanka and Bangladesh highlights the possibility of portfolio diversification in the long run, while the significant bidirectional causalities between the stock markets highlight the lesser degree of portfolio diversifications in the short run. Originality/value Pioneer efforts are made to examine the dynamic linkages between the South Asian stock markets while focusing on regional trade interdependency. The results provide new insight in the dynamics of stock returns of South Asian stock markets in the backdrop of intraregional trade.

This paper aims to understand the financial linkages and interdependence of BRICS (Brazil, Russia, India, China and South Africa) nations through the Government security market considering the 10-year bond yield. Long-run and short-run linkages among the 10-year bond yield of these countries are investigated using Johansen and Juselius' co-integration method. Interdependence and Causal relationship are further explored using correlation, cross-correlation, Granger causality test and Wald test. The coefficients of correlation recorded very small values, yet positive, for the bond markets of BRICS economies except for Russia with Brazil and India. The results of cross-correlation, Granger causality tests and Wald tests suggested several statistically significant unidirectional linkages. The results of Johansen co-integration identified a single balanced relationship in the long run among BRICS countries. The paper suggests and supports the adoption of diversification through investments in these emerging market economies, especially in the long-term government security market, as few countries have revealed negative correlation which would induce in lessening the risk during financial distress.