The dynamics of global financial crises

Abstract

This thesis presents a Markov chain model of the transmission of financial crises. Using bilateral trade data and a measure of exchange market pressure, it develops a method to determine a set of transition probabilities that describe the crisis transmission dynamics. The dynamics are characterized by one month conditional crisis probabilities and the probability of a crisis occurring within one year. Calculations of the transition probabilities for a three country example suggest that minor trading partners can increase the likelihood of a crisis in the home country through their effect on major trading partners.