Financial Contagion: The Impact of Global Disasters

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2011
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Haverford College. Department of Economics
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Thesis
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Award
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eng
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Open Access
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Abstract
Most available literature on the contagion effects of crises focuses primarily on currency crises and does not address the plethora of natural disasters that have occurred recently. This thesis seeks to compare the effects of natural and non-natural disasters as a source of contagion due to fundamentals vs. changes perceptions. Events are divided into two main categories: crises that are expected to remain isolated, and events that are expected to yield spillover effects. Because there is no reason for a natural disaster to affect perceptions of the health of a neighboring country’s economy, financial sector, etc., any contagion effects should be purely due to fundamental links between the two economies. For this reason, non-natural disasters, because of the potential for changes in perceptions are predicted to be a stronger source for financial contagion than natural disasters. Results from an event study examining government bond spreads indicate that contrary to opinion, natural disasters yielded more instances of spillover effects for longer periods of time.
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