This article examines several key global market conditions, such as a proxy for market uncertainty and measures of interbank funding stress, to assess financial volatility and the likelihood of crisis. Using Markov regime-switching techniques, it shows that the Lehman Brothers failure was a watershed event in the crisis, although signs of heightened systemic risk could be detected as early as February 2007. In addition, we analyse the role of global market conditions to help determine when governments should begin to exit their extraordinary public support measures.
Aït-Sahalia, Y., J. Andritzky, A. Jobst, S. Nowak and N. Tamirisa (2009), ‘How to Stop a Herd of Running Bears? Market Response to Policy Initiatives during the Global Financial Crisis’, Working Paper 09/2004, International Monetary Fund, Washington, DC.
2.
Baba, Naohiko, Frank Packer and Teppei Nagano (2008), ‘The Spillover of Money Market Turbulence to FX Swap and Cross-currency Swap Markets’, BIS Quarterly Review, March, pp. 73–86.
3.
Brunnermeier, Markus andLasse H. Pedersen (2009), ‘Market Liquidity and Funding Liquidity’, Review of Financial Studies, 22(6): 2201–38.
4.
Demirguç-Kunt, A. and Enrica Detragiache (1998), ‘The Determinants of Banking Crises in Developing and Developed Countries’, IMF Staff Papers, 45(1): 81–109.
5.
Diamond, Douglas W. and Philip H. Dybvig (1983), ‘Bank Runs, Deposit Insurance, and Liquidity’, Journal of Political Economy, 91(3): 401–19.
6.
Dornbush, R., Y.C. Park and S. Claessens (2000), ‘Contagion: Understanding How it Spreads’, The World Bank Research Observer, 15(2): 177–97.
7.
Dungey, Mardi, Renee Fry, Brenda González-Hermosillo and Vance Martin (2005), ‘Empirical Modeling of Contagion: A Review of Methodologies’, Quantitative Finance, 5(1): 9–24.
8.
Dungey, Mardi, Renee Fry, Brenda González-Hermosillo and Vance Martin (2006), ‘Contagion in International Bond Markets during the Russian and LTCM Crises’, Journal of Financial Stability, 2(1): 1–27.
9.
Dungey, Mardi, Renee Fry, Brenda González-Hermosillo and Vance Martin (2007), ‘Unanticipated Shocks and Systemic Influences: The Impact of Contagion in Global Equity Markets in 1998’, North American Journal of Finance and Economics, 18(2): 155–74.
10.
Dungey, Mardi, Renee Fry, Brenda González-Hermosillo and Vance Martin (2010), ‘Are Financial Crises Alike?—From the 1998 Russian/LTCM Crisis to the 2007 Subprime Debacle and Liquidity Crisis’, IMF Working Paper, International Monetary Fund 10/14, Washington, DC.
11.
Forbes, K. and R. Rigobon (2002), ‘No Contagion, Only Interdependence: Measuring Stock Market Co-movements’, Journal of Finance, 57(5): 2223–61.
12.
Frank, Nathaniel, Brenda Gonzalez-Hermosillo and Heiko Hesse (2008), ‘Transmission of Liquidity Shocks: Evidence from the 2007 Subprime Crisis’, IMF Working Paper 08/200, International Monetary Fund, Washington, DC.
13.
Frank, Nathaniel and Heiko Hesse (2009a), ‘Financial Spillovers to Emerging Markets during the Global Financial Crisis’, IMF Working Paper 09/104, International Monetary Fund, Washington, DC.
14.
Frank, Nathaniel and Heiko Hesse (2009b), ‘The Effectiveness of Central Bank Interventions during the First Phase of the Subprime Crisis’, IMF Working Paper 09/206, International Monetary Fund, Washington, DC.
15.
González-Hermosillo, Brenda (2008), ‘The Role of International Investors’ Risk Appetite in Global Financial Crises: 1998–2007’, IMF Working Paper 08/85, International Monetary Fund, Washington.
16.
Gorton, Gary (2008), ‘The Panic of 2007’, Prepared for the Federal Reserve Bank of Kansas City, Jackson Hole Conference, August.
17.
Group of Ten (2001), Consolidation in the Financial Sector. Basel: Bank for International Settlements.
18.
Hamilton, James D. and Raul Susmel (1994), ‘Autoregressive Conditional Heteroskedasticity and Changes in Regime’, Journal of Econometrics, 64(September–October): 307–33.
19.
Hardy, D.C. and Ceyla Pazarbasiouglu (1999), ‘Determinants and Leading Indicators of Banking Crises: Further Evidence’, IMF Staff Papers, 46(3): 247–58.
20.
Illing, Mark and Ying Liu (2006), ‘Measuring Financial Stress in a Developed Country: An Application to Canada’, Journal of Financial Stability, 2(3): 243–65.
21.
International Monetary Fund (IMF) (2008), Market and Funding Illiquidity: When Private Risk Becomes Public, Global Financial Stability Report, World Economic and Financial Surveys, Washington, DC, April, Chapter 3.
22.
Kaminsky, G.L. and C.M. Reinhart (1999), ‘The Twin Crises: The Causes of Banking and Balance of Payments Problems’, American Economic Review, 89(3): 473–500.
23.
Laeven, L. and F. Valenci (2008), ‘The Use of Blanket Guarantees in Banking Crises’, IMF Working Paper 08/250, International Monetary Fund, Washington.
24.
Lo, Andrew (2008), ‘Hedge Funds, Systemic Risk, and the Financial Crisis of 2007–2008’, Written testimony to the US House of Representatives Committee on Oversight and Government Reform, 13 November.
25.
Masson, Paul (1999), ‘Contagion: Monsoonal Effects, Spillovers, and Jumps between Multiple Equilibria’, in P.R. Agenor, M. Miller, D. Vines and A. Weber (eds), The Asian Financial Crisis: Causes, Contagion and Consequences. Cambridge: Cambridge University Press.