The international financial crisis and its effect on American stock markets
The international financial crisis was formed as a result of a number of factors and practices that were based mainly on US capitalist thinking and banking and financial policies. The crisis deepened before it manifested its manifestations in a number of important economic sectors, because of the freedom that the capitalist system provides for unprecedented market procedures and policies in the world. The absence of effective supervision remained from states and governments. The main cause of the international financial crisis (2008) is the collapse of real estate market in the USA. According to Yong-Hong (2017), as the financial markets integration goes deeper, the correlations between the stock markets become stronger. Along with the deepening of research on stock market correlation, there derives various theories about the stock markets correlation.
The collapse of Lehman Brothers, the fourth largest investment bank in the United States, and the presence of AIG, the largest American insurance company on the verge of bankruptcy, was a mask that demonstrated the distortion of the features of the American economy, and revealed a financial crisis that bore the signs of recession for the world.
Where economists and economists see that the crisis began in the real estate sector in the United States, growing like a snowball, and soon turned to the banks and global financial markets, then threatening the global economy with destruction. The explosion of the global financial crisis has caused many great damages to the economies and markets without discrimination or exception.
The most painful of which was the exacerbation of the liquidity crisis in the financial sectors locally at the level of economies, and even globally after the financial contagion moved from the central United States and Europe to the rest of the world. The liquidity squeeze crisis affected all parties, which represent the resource of life for commercial banks and investment institutions.
The crisis has caused a lack of circulating liquidity among individuals, companies and financial institutions, and many financial institutions have frozen or stopped granting loans to individuals for fear of lack of liquidity and the difficulty of recovering them, which led to a severe economic downturn that the global economy did not know. The global financial crisis caused the deterioration of the American economy, as the contraction rate reached between 0.2% and 1.1%, with a decrease ranging between 2% and 2.8%.
The US Department of Commerce announced at the time that the economy contracted at an annual rate of 0.3% in the third quarter of 2009, marking the strongest decline in seven years. The GDP report also revealed that personal income available for spending decreased by 8.7% in the same year, marking the sharpest decline since the start of the quarterly data for this item in 1947.
The bailout plan was presented to the US House of Representatives on Monday, September 30, 2008. To stabilize the banking sector and boost confidence in it, a number of financial institutions such as Bear Stearns, AIG, Fannie Mae and Freddie Mac were rescued, but the Lehman Brothers bailout plan that failed has failed The breadth of the crisis and its global implications. The result of the vote, which took place five days after its initial rejection, was 263 MPs, compared to 171 opposing it. The big companies were affected very badly from the international financial crisis. Being the originator of the crisis, it was very logical that the United States be more affected than others. During 2008 and 2009 more than 8 million Americans lost their jobs, the Dow Jones industrial lost more than half of its value, and the $ 19 trillion of Americans ’wealth was wasted, and emptied Whole neighborhoods of residents after banks recovered homes purchased with a mortgage system.
Through the introduction, we managed to answer the following questions:
- What are the main causes of international financial crisis?
- How could American economy recover from international financial crisis?
- What is the effect of international financial crisis on American stock markets?
International Financial Crisis 2008 in America
Brian Duignan stated that the St. Louis Federal Reserve Bank projected that during the financial crisis the net worth of American households had failed by about $17 trillion in inflation-adjusted terms, a loss of 26 percent. In a 2018 research, the Federal Reserve Bank of San Francisco found that, 10 years after the start of the fiscal crisis, the state’s gross domestic product was about 7 percent lower than it would have been had the crisis not happened, representing a loss of $70,000 in lifetime income for every American.
Nearly 7.5 million jobs were lost between 2007 and 2009, representing a doubling of the unemployment rate, which stood at nearly 10 percent in 2010. Although the economy slowly added jobs after the start of the recovery in 2009, reducing the unemployment rate to 3.9 percent in 2018, many of the added jobs were lower paying and less secure than the ones that had been lost.
In the United States of America, the crisis was formed by perverse incentives and excessive risk taking in the “shadow financial system”, including among ill regulated financial intermediaries, as well as by complex and opaque securitization structures and tools (credit default swaps and collateralized debt obligations) which were not priced properly. The high leverage and widespread systemic risk thus produced have spread beyond United States borders, resulting in strains on a scale and scope not observed in the past three quarters of a century. Two points are worth noting. One is that systemic risk built up increasingly in the system. The second is that this build-up went unobserved until it was too late. Financial innovation in a period of economic boom appears to have hidden it from view.
Following the turmoil in the subprime mortgage market and the loss of value of a huge amount of derivative instruments that were built on them, global economic conditions have worsened sharply since mid-September 2008. The outlook and the external environment for Latin America and the Caribbean have also worsened meaningfully. Global economic conditions started to deteriorate in mid-2007, when the growth in the unemployment rate in the United States triggered the failure of the subprime mortgage market. The failures in this market swiftly started to impact on the balance sheets of established financial institutions which owned and sold derivative tools with subprime mortgages as underlying assets.
International Financial Crisis 2008 in Africa
According to the African Development Bank’s report (2009), the present financial and economic crisis has impacted the drivers of Africa’s new growth performance. Demand for and prices of African goods are falling, capital flows are deteriorating, and promised improved aid has not materialized. China’s growth has slowed. The only good news is the easing of inflationary pressures. In Asia and Latin-America, growth forecasts have already been radically revised downwards. Although the instant influence of the crisis was contained, the medium-term effects are probably to be greater.
The report also stated that the financial crisis amplified the increase in the margin applied to loans in the global financial markets, particularly for emerging and African states. From October 2008, sovereign debt spreads have enlarged. For that similar reason, several African states (Tunisia, Kenya, Uganda and Tanzania) decided to postpone resorting to global financial markets to mobilize the resources needed for financing their growth, turning instead to local markets.
For the entire continent, inflation was higher in 2008 (10.4%) than in 2007 (7.4%). The 10.4% inflation was 3 proportion points above projections made prior to the financial crisis. In contrast, lower inflation is projected in 2009 (8.6%). However, dropping oil prices notwithstanding, inflationary pressures will persist in numerous states, chiefly due to the high cost of foodstuff and supply bottlenecks (African Development Bank’s report, 2009).
FranklinAllen and GiorgiaGiovannetti (2011) stated that the economic and financial crisis came on top of a period of highly volatile commodity prices and exchange rates, which increased doubt and reinforced a vicious circle of falling trade flows and investments. Food and fuel price spikes through mid-2008 put food-importing and oil-importing Sub-Saharan African fragile countries under severe stress, pushing down their foreign exchange reserves and making it hard for them to pay for imports and to sustain growth. On the other hand, oil-exporting nations have benefited from increased revenues and several have been able to strengthen their foreign reserve position. However, the boom and slump contributed to output volatility, discouraging investments in long-run productive capacity.
International financial crisis 2008 in Europe
Lewis (2018), the mortgage crisis in the United States has become a global problem. It was noticed in Europe the highest rates of inflation in recent years, while the state of the economy in the European region raises increasing concerns among Europeans themselves and the whole world. Economist Jacques Sapir, director of the High School of Social Studies in Paris, believes that Europe can witness the beginning of a severe slowdown in economic growth.
European financials are very concerned about the unprecedented strengthening of the euro against the dollar. This significant growth in the euro exchange rate makes the goods of European producers weak competitive and could have a negative impact on the region’s exports. EADS, one of the largest aircraft manufacturers in Europe, has announced a significant drop in its profits for the year 2000. General Motors Europe also expressed its intention to reduce manpower in its factories. Many other well-known companies are threatened with the same behavior.
Hernot Nerb, director of the IOFO Institute for Scientific Research in Munich, confirms that many European companies have gone bankrupt or are on the way to bankruptcy due to the very high rate of the euro exchange rate. This could lead to a significant increase in unemployment. Experts also warn of the possibility of a mortgage crisis in some European countries, mainly Britain and Spain, and the shrinking of investments in European financial assets.
In light of the global crisis, the economy of the European region could become less stable and resilient than the United States. This is primarily due to the lack of coordination in the budget policy and the absence of the joint unified management of budgets in the European Union.
International financial crisis 2008 in Asia
The unanticipated speed and force of the international financial crisis affected Asian economies through both the trade and financial channels, reflecting the area’s deep economic integration with the rest of the world as stated by Heng Swee Keat (2012).
This efficiently put to rest earlier notions that Asia had become “decoupled” from developments in the U.S. From peak to trough, Asian exports tumbled by over 30 percent, average sovereign credit default swap (CDS) spreads maximized more than threefold for five Asian economies, and emerging Asia stock prices fell by more than 60 percentages.
Exchange rates also came under pressure in a number of states in the region. Asian economies, excluding China and Japan, contracted by an average of about 6.2 percent from peak to trough in the present downturn. This is not far from the 8.3 percent gross domestic product (GDP) contraction during the Asian financial crisis, although Asia was not at the center of the current crisis.
- Felix Raj S.J. and Samrat Roy (2013) stated that the excess savings in Asia was termed as one of the major causes for the crisis as a result of the flow of savings into advanced economies at a lower interest rate which spurted the tendency to overspend. The final crisis has led to a main global recession which has been coursed through three main channels, namely, export collapse, reversal of capital flows, and the weakening of market confidence. Experts are referring to this as the first international recession in the new era of globalization.
The consequences of the crisis are various. Asian economies being highly trade-dependent have suffered hugely in terms of declining growth in exports and imports. An anti-globalization sentiment has been rising whereas questions have been raised about the future of the export-led Asian growth model. Trade patterns and production structures in Asian nations built over decades in order to export to advanced economies have been suffered by the crisis. Although the magnitude of the influence on India is still low, it could possibly weaken the economy through trade channels if not tackled correctly, at a time when India is much more globalized than in the early 1990s.
INTEPRETATION OF THE ANLYSIS RESULTS
Small Companies
It is noted that the adjusted closing had a positive return on average of around 0.000379041. This shows what the small companies were manifesting on average during the financial crisis. The standard error shows the dispersion of the logarithm returns from the average. Since the data has a lesser standard error of 0.000211147 than the average log return, it implies that sample data is a true representation of the actual situation of stock markets of the small companies during the crisis.
The median gives the middle number (price values) of the data right from the start of the adjusted closing to the end of the collection of this small companies. Therefore, the log return middle number is 0.000938208. The data also indicates that there were no repeated values that were recurring during the crisis. Hence the zero mode return.
The square root of the variance gives the standard deviation which measures the dispersion of the this set of data in relation to the mean. Therefore, the variation of each log return resulted to 0.013810349.
The sample variance was 0.000190726 which is the relative performance of each log return in relation with the sample mean. The kurtosis is 5.871682468 which is a positive value greater than 3 indicating a peaked curve. The data is also negatively skewed -0.356182535 which shows more values on the left side than the sample mean.
The difference between the highest and the lowest values gave a range of 0.197408994. The minimum and the maximum log return being -0.116252211 and 0.081156783 respectively. The total number of the log returns is 1.621536103 for a total of 4278 entities or counts.
The analysis was based on a 95% confidence interval which is approximately 0.05.
The coefficients follow a linear equation of the intercept y with variable X. The linear equation is y = mx + b where y is the intercept, X the variable and constant b. but since the second p-value 0.210948748 is larger than the confidence interval, it signifies that there is no relationship between the intercept y and variable x. Hence the p-value is statistically insignificant.
Medium Companies
unlike the small companies, medium companies exhibit different output with different significance.
The average mean of the log return is 0.000439456 which is number found by summing all the logarithm returns and dividing by the total number of counts. The least square estimate gives the standard error of 0.000192869 which shows the significance of the data given its way less than the mean.
The arrangement from the first to the last gives 0.000948457 as the middle number with no repeated values in the dataset. The dispersion of the dataset from the mean is 0.01261489 which is actually the standard deviation. It is greater than the mean showing insignificance of the dataset
The sample variance which measures the spread of specific dataset of each in relation to the sample mean. The curve has a higher peak since the kurtosis is greater than the normal standard average of 3. This dataset has a peaked curve kurtosis of 8.504422129.
The curve is negatively skewed -0.302407456 showing that there are more values on the left side of the curve.
The range of values between the highest and the lowest is 0.213625606 with a minimum of -0.108869693 and a maximum of 0. 104755913.The sum total of the 4278 Count dataset is 1.879990886.
For coefficients, the y intercept 0.00049703 and the x variable -0.0004812 on the linear regression results to insignificant relationship since the second p values are higher at 95% confidence interval.
Large Companies
It follows for large companies that the average mean of the log return is 0.000361304 with a significant standard error of 0.00017291 less than the mean which shows the data is a true representation. Median is 0.000696794 which is the middle number arranged either from the highest to the lowest value or vice versa.
With zero repeated values, the standard dispersion from the mean is 0.011309414 with their distance from the mean of each value being 0.000127903. The sample variance measuring the value distance of each set from the mean.
Large companies tend to have the highest kurtosis of 11.90994769 which is negatively skewed with -0.131859333 showing more values on the left side of the peaked curve. The value range between highest and lowest being 0.206150148 with -0.090349778 and 0.11580037 being minimum and maximum respectively. The 4278 entities sum to a total of 1.545658304.
Just like the small and medium companies, the large companies’ data has insignificance since their p values ranges above the confidence interval given the y intercept and the x variables as 0.00044206 and -0.0006859 respectively on a linear equation of y = mx + b where y is the intercept, X the variable and constant b. the confidence interval is 95%.
CONCLUSION
After the crisis, budgetary trades in made countries a tiny bit at a time returned to regular position and the connection between’s protections trades in made countries and China is organizing further. The repercussion effect of unit paralyze in the U.S. promote reduced, anyway was up ’til now higher than the pre-emergency level. In the wake of researching the dynamic responses of all of the six markets to improvements in a particular market, using the imitated responses of the surveyed VAR structure, it was conspicuous that the greater part of the responses to a daze were done inside three days. The delayed consequences of drive reaction additionally recommend that Hong Kong and Japan as finished-thing convey arranged economies were enormously influenced by U.S. during the crisis. The all in all higher co-improvement in overall protections trades than in pre-crisis period may reflect that continuously normal paralyzes were shared by these budgetary trades during the crisis: credit subsidiaries diminished in regard, the housing cost dove, transformation standard fluctuated and gigantic mutual funds were moved extensively. Furthermore, cautions among particular money related experts in like manner animated the co-advancement of overall protections trades. In addition, the electrifying augmentation of waiting connection amongst Japan and various markets is not completely achieved by the flight of Japanese hot money. Overall, it will in general be assumed that the financial crisis fortified the relationship of the worldwide markets. The co-improvement and the dependence have yet not obscure away, anyway the co-developments of Hong Kong and Japan with other overall markets have reduced after the crisis, the reliance of various markets remains perceptible and significantly more grounded in the post-crisis period
From the data analysis based on the hypothesis tested, It can be concluded that;
- All companies were negatively affected by the financial crisis. At 95% confidence interval, their p-values drawn from the coefficients ranged above confidence interval. This is statistically interpreted that there was no significance of the hypothesis tested meaning that the effects were felt by the companies.
- Medium companies tend to be the most negatively affected companies since their p value ranged way above the confidence interval. There is a bigger negative skewness on the curve. At alpha 0.05, medium companies had a log return of 0.42083141 which is greater than 0.05. this large distance from the confidence interval indicates the strength of the effects of the crisis.
- Small companies also got negatively affected after medium companies because we also note that their p values are greater than the 95% confidence. Most values were found on the left(negative) side of the curve indicating that the effects of the financial crisis were felt.
- However, large companies were less negatively affected by the crisis given their closeness to the confidence interval and having less values on the left side of the kurtosis curve. They had small coefficient variables that produced a small range of p values close to the confidence interval showing that the effects felt were weak compared to the medium and small companies.
Overaly, it might be contemplated and concluded that the financial crisis sustained the relationship of the overall markets. The co-improvement and the dependence have yet not obscure away, anyway the co-advancements of Hong Kong and Japan with other overall markets have reduced after the crisis, the relationship of various markets remains discernible and considerably more grounded in the post-crisis period
LIMITTATIONS OF THIS STUDY
The time frame of the assessment for which the years utilized as the period test are 990-91 onwards. Thusly the basic outcomes, result and conversations are on a very basic level on the line of post movement period.
In spite of the way that at beginning level 1997-98 budgetary crises of Asian countries beginning from Thailand (which was progressing at the twofold digit notwithstanding advancement rate expected to face cash related crisis having it infection effects on various countries in Asian and Latin American countries. Indonesia, Korea, China and India to a certain point) Japan, Hong Kong, Singapore, Argentina had a couple of effects of vulnerability the principle driver of this crisis was the outside commitment, particularly the flashing commitment extent which was high, to which the Thailand economy couldn’t adjust up and was obliged to devaluate its money yet under all-inclusive strain.
The sample data may not be the true representations of the whole population since the financial crisis was a global issue. This would consequently lead to bias interpretations and conclusions.
Being a wide study area, access to rightful sources needed for the research was not properly utilized due to financial constraint. Due to this, secondary data which is subject to change and human tampering was the only option and could not have recorded the rightful information.
The methodologies of the research cannot sometimes be truly replicated where some experimental conditions cannot be controlled causing uncertainties in the data verification. The model employed could provide narrow results which may affect the primary objective of the study.