Investigation of evidence of the spread of the U S financial crisis and contagion to Europe with focus on the UK



In this day and age of multinational businesses and unified regional and international financial systems, financial and economic crises have become particularly widespread, severe, and sudden, instantaneously crossing borders through the international banks that are invested in countries initially embroiled in the crisis. The weakening of the banks in other countries as a result of the contagion speeds up the spread of the crisis into other economies. While it is true that globalization is inevitable, it remains to be determined whether or not regulatory frameworks and infrastructures would be sufficient to arrest the spread of potential financial crises that attend globalization. This study will examine the most recent U.S. financial crisis, how it developed and spread to other Western countries, how the U.S. appears to have recovered while European countries Greece, Italy, Cyprus and Spain still reel under the effects thereof, and the possibility that the European crisis will either be resolved or if it shall spread backwards towards the U.S. and other countries (Businessweek, 2012. Forbes, 2012). . 1.2 Purpose of the study The study deals with the contagion that had taken place due to the financial crisis of 2008. The contagion refers to the negative effects on the financial markets that spread from the US markets to other countries of the world, as a result of market linkages. The focus of the discussion is the empirical evidence of the spread of the contagion from its point of origin in the United States to the economy of the United Kingdom and the European Union. Evidence of the contagion is also sought in the Australian economy, to determine if the contagion has spread to another country outside of the US-Europe paradigm. The study dwells exclusively on the stock indices of the US, the UK, the European Union, and Australia, and searches for evidence of the contagion within the capital markets. 1.3 Research questions In order to attain the goal specified for this dissertation, the following research question shall be resolved: 1.3.1 Is there evidence of contagion in the stock markets between the US and the UK? 1.3.2 Is there evidence of contagion in the stock markets between the US and the EU? 1.3.3 Are there discernible contagion effects between the UK and EU stock markets? 1.3.4 Are there contagion effects between Australia the one hand, and the US, the UK and the European stock markets on the other hand? The findings that were generated by the answers to the foregoing questions are expected to shed light on the main research problem and lead to a valid and acceptable conclusion. 1.4 Significance of the study The study is significant because of the persistent nature of financial crises and the phenomenon of financial contagion. Since globalization, financial crises and contagion have become repetitive, continuing, and constantly evolving. The last great crisis in the US was the Great Depression ushered in by the Wall Street Crash of 1929. The effects of this crisis was largely contained within the US since national economies then were relatively isolated except for international trade, and the speed and volume with which transactions were carried out was slow and low enough to keep the economies sufficiently separated as to prevent any contagion from taking place. The next significant crisis took place four decades later, in the 1973