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Title: Stock markets crisis and contagion : risk appetite, dependence and liquidity
Author: Chen, Sichong
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2007
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As the study of financial crisis and contagion becomes increasingly important in both academia and practice, this thesis aims to measure financial crisis and contagion with a new concept "risk appetite"; and a relatively new dependence measure, copula. It also studies the role of liquidity in the global financial markets, especially the role of liquidity during the financial crisis period. This topic is becoming especially important, as evidenced by the recent incident of Northern Rock. To measure the investors' perceptions and examine the changes of their perceptions during extreme events, I have constructed one world and three regional risk appetite indices following the method of CSFB. Unlike risk aversion, risk appetite reflect short term fluctuation of investors' attitude about risk taking. With these risk appetite indices, I find that different regions behaved differently when hit by extreme events. In general, it took a longer time to restore investors' confidence after a drastic change of economic fundamentals compared with terrorist attacks. The second study that uses copula to test for contagion closely follows the study by Forbes and Rigobon (2002) on the same issue. Three versions of copula dynamics are used. We find strong evidence of an increase in dependence between stock market returns during the Asian financial crisis, contrary to the findings in Forbes and Rigobon (2002). The third study examines the role of liquidity in the financial markets and the relationship between funding liquidity and market liquidity. Using the Amihud (2002) liquidity measure, I have constructed market-wide liquidity measures for 37 stock markets. I find volatility to be a very important driving factor for market illiquidity and stock market illiquidity condition has a tendency to persist. I also find that Regional and the U.S. stock market returns do not affect local illiquidity. Regional and the U.S. stock market illiquidity shocks, on the other hand, affect local illiquidity. However, the greatest impact on local market illiquidity comes from the local market return. Illiquidity shock in the Hong Kong stock market has a greater impact than its stock market return on the other markets liquidity during the Asian crisis. This impact was shown to be stronger than that during the non-crisis period. Hence. contrary to common beliefs, illiquidity does not cause extreme returns and stock illiquidity, and not stock return that propagates.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available