Introduction “The classic account of financial contagions presents a standard pattern in which speculative fevers are caused by the appearance of new, unusually profitable investment opportunities” what if one replaces “unusually profitable investment opportunities” with “subprimes” ?
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Introduction “The classic account of financial contagions presents a standard pattern in which speculative fevers are caused by the appearance of new,
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Introduction
“The classic account of financial contagions presents a standard pattern in which speculative fevers are caused by the appearance of new, unusually profitable investment opportunities”
what if one replaces “unusually profitable investment opportunities” with “subprimes” ?
Defining crises
how does a crisis work? (a) a new product appears (b) prices of the “new product” go up to unsustainable peaks (c) panic follows as investors sell assets, beginning with the “new product” (d) later passing to anything similar
Defining crises
factors fostering/preventing the spread of a crisis:capital mobilityfixed currency exchange ratesfinancial regulation
types of crises:banking crisescurrency crises
Rules and solutions to prevent or stop crises
a relation between interpreting and solving crises
needing a “lender of last resource”example: a central bank injecting
liquidity
fighting moral hazard with ruleslet the market go and learn the lesson
Rules and solutions to prevent or stop crises
solutions should consider the type of crisis and the players concerned
lender of last resource:usefull if economies involved are soliduseless if economies involved are weak
rules against moral hazard:usefull if economies involved are weakuseless if economies involved are strong
Crises propagation: interdependance vs contagion
crises may spread in two ways: (a) interdependence (b) contagion
interdependence crisis naturally spreads to markets that
are integrated
price correlation of financial products in different markets is mostly determined by this integration
Crises propagation: interdependance vs contagion
contagionrequires the involvement of loosely
integrated economies
determines a faster and broader spread of the crisis
price correlation overcomes any possible statistical distorsion
Financial crises, an historical overview
looking for contagion in the historical record, from 1637 to 1997
evidence needed isrates correlation (covariance) among
different markets, and different products: (short terms
bank loans, bonds, equities …)
seeking for the lessons learned
The first crisis: Amsterdam’s tulip mania (1636-1637)
1636-37, a “frenzy” determined by a new product: bulbs from China