Question

Arianna is a congresswoman concerned about financial crises and the stock market. She proposes a law that eliminates short-term stock trading by requiring investors to hold onto shares for at least three years. This law would cause stocks on the market to have _____.

Answer 1

This paper investigates financial contagion in a multivariate time-varying asymmetric framework, focusing on four emerging equity markets, namely Brazil, Russia, India, China (BRIC) and two developed markets (U.S. and U.K.), during five recent financial crises. Specifically, both a multivariate regime-switching Gaussian copula model and the asymmetric generalized dynamic conditional correlation (AG-DCC) approach are used to capture non-linear correlation dynamics during the period 1995–2006. The empirical evidence confirms a contagion effect from the crisis country to all others, for each of the examined financial crises. The results also suggest that emerging BRIC markets are more prone to financial contagion, while the industry-specific turmoil has a larger impact than country-specific crises. Our findings imply that policy responses to a crisis are unlikely to prevent the spread among countries, making fewer domestic risks internationally diversifiable when it is most desirable