The 2011 Japanese earthquake, tsunami and nuclear crisis: evidence of contagion from international financial markets

Simplice A., Asongu (2011): The 2011 Japanese earthquake, tsunami and nuclear crisis: evidence of contagion from international financial markets. Forthcoming in:

Abstract

Abstract Purpose – Natural disasters may inflict significant damage upon international financial markets. The purpose of this study is to investigate if any contagion effect occurred in the immediate aftermath of the Japanese earthquake, tsunami and subsequent nuclear crisis.

Design/methodology/approach – Using 33 international stock indices and exchange rates, this paper uses heteroscedasticity biases based on correlation coefficients to examine if any contagion occurred across financial markets after the March 11, 2011 Japanese earthquake, tsunami and nuclear crisis. The sample period is partitioned into two sections: the 12-month pre-earthquake period (March 11, 2010 to March 10, 2011) and the 2-month post-earthquake period (March 11, 2011 to May 10, 2011). While the stability period is defined as the pre-earthquake period, the turbulent (turmoil) period is defined as the post-earthquake period. In a bid to ensure robustness of our findings, the turmoil period is further partitioned into two equal sections: the 1-month (short-term) post-earthquake period (March 11, 2011 to April 10, 2011), and the 2-month (medium-term) post-earthquake (March 11, 2011 to May 10, 2011).

Findings – Findings reveal that, while no sampled foreign exchange markets suffered from contagion, stock markets of Taiwan, Bahrain, Saudi Arabia and South Africa witnessed a contagion effect.

Practical implications – Our results have two paramount implications. Firstly, we have confirmed existing consensus that in the face of natural crises that could take an international scale, emerging markets are contagiously affected for the most part. Secondly, the empirical evidence also suggest that international financial market transmissions not only occur during financial crisis; natural disaster effects should not be undermined.

Originality/value – This paper has shown that the correlation structure of international financial markets are also affected by high profile natural disasters.

• Item Type: MPRA Paper
• Language: English
• Keywords: Japanese Earthquake; Contagion; International Financial Markets
• Subjects: F - International Economics > F3 - International Finance > F30 - General; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Anoruo, E., & Mustafa, M., (2007). “An empirical investigation into the relation of oil to stock market prices”, North American Journal of Finance and Banking Research, 1(1), pp. 1-15.

Asongu, S. A.,(2011a). “Globalization, financial crisis and contagion: time-dynamic evidence from financial markets of developing countries”, MPRA 30120.

Asongu, S.A.,(2011b). “Political Crises and Risk of Financial Contagion in Developing Countries: Evidence from Africa”, MPRA 30391.

Calvo, G.A., Leiderman, L., & Reinhart, C.A.,(1996, Spring). “Inflows of capital to developing countries in the 1990s”, Journal of Economic Perspectives, 10, pp.123-139.

Collins, D., & Biekpe, N., (2003). “Contagion: a fear for African equity markets?” Journal of Economics and Business, 55, pp. 285-297.

Coulibaly, B.,(2009). “Effects of financial autarky and integration: The case of South Africa embargo”, Journal of International Money and Finance, 28, pp.454-478.

Demyanyk, Y., & Volosovych, V., (2008). “Gains from financial integration in the European Union: Evidence for new and old members”, Journal of International Money and Finance, 27, pp. 277-294.

Forbes, K. J., (2000). “The Asian flu and Russian virus: firm-level evidence on how crises are transmitted internationally”, NBER Working Paper 7807.

Forbes, K., & Rigobon, R., (2002, October). No contagion, only interdependence: measuring stock market co-movements, Journal of Finance. 57(5), pp 2223–2261.

Frankel, J. & Rose, A.K., (1996, November). “Currency crashes in emerging markets: An empirical treatment”. Journal of International Economics, 41, pp. 351-366.

Henry, P.B.,(2007, December). “Capital Account Liberalisation: Theory, Evidence and Speculation, Journal of Economic Literature, XLV, pp. 887-935.

In, F., Cui, J., & Mahraj, A., (2008). “The Impact of a new term auction facility on LIBOR-OIS spreads and volatility transmission between money and mortgage market”. http://papers.ssrn.com/sol3/papers.cfm?abstract id=1272806 (unpublished manuscript).

Ji, P. I., & In, F., (2010). “The Impact of the global financial crisis on the cross-currency linkage of LIBOR-OIS spreads”, Int. Fin. Markets, Inst. and Money, 20, pp.575-589.

Kanas, A., (1998). “Linkages between the US and European equity markets: further evidence from cointegration test”. Applied Financial Economics, 8 (6), pp. 607–614.

King, M., Sentana, E., & Wadhwani, S., (1994). “Volatility and links between national stock markets”. Econometrica, 62 (4), pp.901–933.

King, M., & Wadhwani, S., (1990). “Transmission of volatility between stock markets”, Review of Financial Studies, 3(1), pp.5–33.

Kose, M.A., Prasad., E.S., & Taylor, A.D.,(2011). “Thresholds in the process of international financial integration”, Journal of International Money and Finance, 30, pp.147-179.

Lee. H., Wu. H., & Wang. Y., (2007). “Contagion effect in financial markets after the South-East Asia Tsunami”, Research in International Business and Finance, 21, pp.281-296.

McAndrews, J., Sarkar, A., & Wang, Z., (2008). “The Effects of the term auction facility on the London inter-bank offered rate”, Federal Reserve Bank of New York Staff Reports 335.

Obstfeld, M., (1986, March). “Rational and self-fulfilling balance of payments crises”. American Economic Review, 76, pp.72–81.

Schmukler, S.L.,(2004, April). “Financial Globalization: gain and pain for developing countries”. Federal Reserve Bank of Atlanta Economic Review, pp.39-66.

Taylor, J.B., & Williams, J.C., (2008). “Further results on a black swan in the money market. Stanford Institute for Economic Policy”, Research Discussion Paper 07-046.