No Economic System Is Safe. Shocks Travel Quickly and Unexpectedly
FINANCE |

No Economic System Is Safe. Shocks Travel Quickly and Unexpectedly

A STUDY BY MARIANO MAX CROCE SHOWS HOW THE SHOCKS OF UNCERTAINTY ARE TRANSMITTED FROM SMALL COUNTRIES TO LARGER ONES

A global economy is exposed to the spread of disturbances from one market to others. One might think that this kind of pass-through mainly works in one direction: from bigger countries to smaller countries. Max Mariano Croce, Riccardo Colacito, Yang Liu and Ivan Shaliastovich found that it is usually the other way round: shocks are more easily transmitted from smaller countries to bigger countries.
 
Focusing on the international propagation of output volatility shocks to consumption, equity prices, and currencies, the authors compared a volatility index that takes into account the difference between actual and estimated GDP to macroeconomic data from 1971 to 2013 for 17 major industrialized countries. These were  divided into G7 countries (Canada, France, Germany , Japan, Italy, United Kingdom, United States) and other G17 countries (Australia, Belgium, Denmark, Norway, New Zealand, the Netherlands, Portugal, Spain, Sweden, Switzerland).
 
“The average consumption pass-through is 50%, meaning that a 1% increase in output volatility in country A increases consumption volatility in country B by 0.5%”, professor Croce says. The average pass-through rises to 70% for shocks originating in small countries. How does it happen? “Trading financial derivatives helps smaller countries to increase their export-to-output ratio. The local output volatility shock spills over to the other country”. Due to financial integration, the effect is even greater on stock markets: the equity volatility pass-through is 90%. “We also found that the volatility of consumption differentials and the volatility of exchange rates are disconnected”.

Read more about this topic:
Massimo Marinacci. Understanding Risk in Companies and Our Lives
The Real Trouble Starts When We Think We Can Calculate Everything
Corporate Governance Is not Safe from Black Swans
A Bridge Where Decision Theory Meets Risk Analysis
Policy Makers React to Ambiguity Like Other Humans Do
When International Trade Increases the Chance of Conflict
With the Monte Carlo simulations, an epochal revolution in the probabilistic risk assessment of business plans has arrived
How to Make Your Non-performing Loans Harmless
New Sanitation System Can Half Healthcare Associated Infections and Reduce Related Costs by 75%

by Claudio Todesco

News

All News
  • ScienzaNuova, Mathematics Also Thinks Over Ontology

    The third edition of the research and experimentation forum on the fundamental concepts of modern science, in collaboration with the Accademia di Studi Italo Tedeschi and the contribution of the Cariplo and Suedtiroler Sparkasse Foundations  

  • Physics, Mathematics, Computer Science: Fundamental Science at Bocconi

    In a Rai Tre broadcast, Riccardo Zecchina, a physicist who teaches Computer Science, recounts his day as a researcher and illustrates the University's growing interest in data science and artificial intelligence  

Seminars

  September 2019  
Mon Tue Wed Thu Fri Sat Sun
            1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30            

Seminars      

All Seminars
  • What's so special about Born Globals? Their entrepreneurs or their business models?

    Jean-Francois Hennart (Tilburg University)

    Meeting room 4E4SR03 - Via Roentgen, 1

  • Collective Reputation
    Economic Theory, Decision Theory and Experimental Economics

    Roland Strausz (Humboldt-Universität Berlin) Abstract

    Seminar Room 3.e4.sr03 - Via Roentgen 1