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JOURNAL OF APPLIED BUSINESS AND ECONOMICS

Financial Contagion: An Empirical Investigation of the Relationship Between

Financial-stress Indexes of Australia and the US

Author(s): Sandra Mukulu, Samanthala Hettihewa, Christopher S. Wright

Citation: Sandra Mukulu, Samanthala Hettihewa, Christopher S. Wright, (2014) "Financial Contagion: An Empirical Investigation of the Relationship Between Financial-stress Indexes of Australia and the US," Journal of Applied Business and Economics, Vol. 16, Iss. 3, pp. 11-34

Article Type: Research paper

Publisher: North American Business Press

Abstract:

A key departure in this study from many earlier studies is that, on the continuum of financial stress from

nil to very high, both very high levels of stress and very low levels are seen as being harmful and

potential harbinger of a financial-market crisis. Specifically, a surfeit of stress can act as a tipping point

into crisis and a dearth of stress can encourage hubris and increase a nation’s susceptibility to financial

contagion from another nation; even one that is far removed by geographic and/or economic distance.

This paper focuses on developing financial stress indices for the US and Australia using composite

market indices, trade weight indices and yields on securities with different maturity dates. Monthly data

from January 1989 to December 2011 was sourced from the Australian Bureau of Statistics (ABS), the

Reserve Bank of Australia (RBA), the Federal Reserve Bank (FRB), the Bureau of Economic Analysis

(BEA), the Federal Reserve Bank of St Louis website, Bank of Canada, Reserve Bank of New Zealand and

Yahoo finance website. For purposes of this study the aggregate measures of stress consists of inverted

yield spreads, volatility measures for market indices, volatility measures of trade weighted indexes, risk

spreads, credit risk spreads and a measures of risk in the equity market.