Effect of catastrophic disaster in financial market contagion

Abstract

The study examined the contagion effect of financial market volatility from Australian capital market to Indian, New Zealand, Hong Kong, Chinese, Taiwan, and Japanese capital markets due to Australian catastrophe. In the first stage, we employed two-variable vector autoregression (VAR) model for calculating the residuals of the daily index return. In the second stage, we used adjusted correlation coefficient for detecting the significant increase in correlation coefficient of the VAR residuals after the catastrophes. Finally, Fishers r to z transformation was used for identifying contagion. After Victoria bushfire, a significant increase in the adjusted correlation coefficient of Australia with India and Hong Kong and their respective z > +1.96 validates contagion. The adjusted correlation coefficient of Australia with China and Japan increased after the Victoria bushfire but the z < +1.96 with (p > 0.05) does not confirm contagion, but rather exposed the persistence of high economic linkage. Apart from this, a significant decrease in the correlation coefficients with New Zealand is evident with corresponding z < −1.96 and (p < 0.05) advocates low economic linkage among them. After New South Wales (NSW) bushfire, contagion persists only between Australia and Hong Kong and the economic linkage of Australia and Taiwan has notably increased. The negative z score with (p > 0.05) confirms absence of contagion effect in New Zealand, India, and Japan after shocks. The findings of the study recommend the Hong Kong and Indian investors to carefully examine the catastrophe-sensitive industry before taking major investment decisions.

Keywords:

• financial market volatility
• contagion
• environmental catastrophe

JEL classifications:

• C01
• E44
• G15

Public Interest Statement

In recent times, Victoria and New South Wales (NSW) bushfires affected the Australian economy in many ways; declined the agricultural productivity and economic growth; destroyed many small and medium businesses; dropped the profitability in tourism industry in those areas; and increased the stock market volatility of Australia after approximately a month of those catastrophes. Besides, many qualified human resources died in those disasters whose exact economic values are uncountable yet. This particular paper investigates the extent of the said catastrophes to the Australian capital market and also more importantly examined the contagion (volatility transmission effect) of the said bushfires in the capital markets of India, New Zealand, Hong Kong, China, Taiwan, and Japan using ex-ante and ex-post market index value. The study found, after Victoria bushfire, contagion occurred from Australia to India and Hong Kong and after NSW bushfire, it occurred in Hong Kong only.

Additional information

Notes on contributors

Md. Noman Siddikee

Md. Noman Siddikee is an adjunct assistant professor of Finance at the Department of Business Administration of City University, Khagan, Bangladesh. He was a permanent assistant professor of Finance at the Department of Business Administration of International Islamic University Chittagong, Bangladesh. Basically, Siddikee is a financial market researcher and continuously doing research about financial market efficiency, factors affecting market volatility, and contagion effect. Already he has published two research articles about stock market efficiency and market volatility and one research article about portfolio performance analysis in investing Islamic banks’ security of Bangladesh. Mostly, he is doing parametric research work using various econometric models. Now, Siddikee is broadening his research interest about various catastrophic disasters and environmental effect in the global financial markets under the supervision of Mohammad Mafizur Rahman, senior lecturer of Economics at the Department of Economics and Banking of School of Commerce, University of Southern Queensland (USQ), who is also the co-author of this research article and the proposed PhD supervisor of Siddikee at USQ.