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We investigate whether or not the effects of the subprime financial crisis on 12 Asian economies are similar to those of the Asian financial crisis by examining volatility spillovers and time-varying correlation between the US and Asian stock markets. After pretesting volatility causality and constancy of correlation, we estimate an appropriate smooth-transition correlation VAR-GARCH model for each Asian stock market. First, the empirical evidence indicates stark differences in stock market linkages between the two crises. The volatility causality comes from the crises-originating country. Volatility in Asian stock markets Granger-caused volatility in the US market during the Asian crisis, whereas volatility in the US stock market Granger-caused volatility in Asian stock markets during the subprime crisis. Second, decreased correlations during the period of financial turmoil were observed, especially during the Asian financial crisis. Third, the estimated points of transition in the correlation are indicative of market participants’ awareness of the ensuing stock market crashes in July 1997 and in September 2008.

At the time they occurred, the savings and loan insolvencies were considered the worst financial crisis since the Great Depression. Contrary to what was then believed, and in sharp contrast with 2007–2009, they in fact had little macroeconomic significance. Savings and Loan (S&L) remediation cost between 2 percent and 3 percent of Gross Domestic Product (GDP), whereas the Troubled Asset Relief Program (TARP) and the conservatorships of Fannie and Freddie actually made money for the US Treasury. But the direct cost of government remediation is largely irrelevant in judging macro significance. What matters is the cumulative output loss associated with and plausibly caused by failing financial institutions. I estimate output losses for 1981–1984, 1991–1998, and 2007–2026 (the latter utilizing forecasts and projections along with actual data through 2015) and, for a final comparison, 1929–1941. The losses associated with 2007–2009 have been truly disastrous – in the same order of magnitude as the Great Depression. The S&L failures were, in contrast, inconsequential. Macroeconomists and policy makers should reserve the word crisis for financial disturbances that threaten substantial damage to the real economy, and continue efforts to identify in advance financial institutions which are systemically important (SIFI), and those which are not.

The finance literature has not documented the feeling, the shock and the pain that ordinary people had to go through during the 2008 global financial crisis especially in the United States where it all began. In an effort to shed new light on the global financial crisis, it has become important to present a view of the financial crisis from the lens of those who were affected by the crisis, those who were responsible for the crisis, those who could have prevented the crisis, as well as the views of other observers. The views or quotes in this chapter are concise, useful and thought provoking. They create an opportunity to help reconsider the events of 2008 from a fresh perspective, so that a lot more can be done by everyone, including banks, governments and citizens, to prevent a repeat of those events in the future of finance. Finally, most of the views or quotes reported in this chapter have within them some important lessons and wisdom to guide us on what to do before another future crisis comes.

The current US financial crisis has elicited unprecedented responses by various government agencies and institutions. The current crisis is the most serious since the 1930s in terms of its financial and economic impacts and global repercussions, but its origin in the largest developed country in the world contrasts with other crises originated in emerging markets. We survey the issues pertaining to the similarities and differences in the causes and policy responses in the current US financial crisis versus the Asian financial crisis in 1997–1998. We discuss the implications for prevention and management of similar financial crises in the future.

This paper investigates the change in informational spillover between nine Asian capital markets and the United States as a result of the 1997–98 financial meltdown in Asia. Our study period extends from about three years prior to the start of the crises on July 2, 1997 to one year after this date. We conduct spillover studies on daily stock market index prices and returns to determine the changes in market interdependence. Our results indicate a considerable increase in cross‐border cointegration during the crisis. Dramatic shifts in predictability and volatility spillovers are observed in most Asian countries as a result of the Asian financial crisis, providing evidence of an increase of interdependence between Asian countries, and thus suggesting contagion. We observe a strong interdependence with the US markets before the crisis, which persists during the crisis. We also show that Hong Kong and Korea have emerged as the most dominant influences in the region during the Asian financial crisis.

The authors aim to report empirical linkages between the US and Brazil, Russia, India and China (BRIC) financial stress indices catalyzing catalyzing dependent economic policy initiatives (an extended version of Singh and Singh, 2017a).

Initially, the study develops financial stress indices for the respective BRIC financial markets. Later, it captures linkages among the said US-BRIC indices by using Johansen cointegration, vector autoregression/vector error correction models (VECM), generalized impulse response functions, Toda–Yamamoto Granger causality, variance decomposition analyses and bivariate generalized autoregressive conditional heteroskedasticity (GARCH) model under constant conditional correlation framework, in general. Markov regime switching and efficient causality tests proposed by Hill (2007) are also used.

Overall, there are both short-run and long-run dynamic interactions observed between the US and Indian financial stress indices. For rest of the markets, only short-run interactions are found to be in existence. The time-varying co-movement coefficients report financial contagion impact of the US financial crisis on Russian and Indian financial systems only. Contrary to this, Brazilian and Chinese financial systems are largely exhibiting interdependence with the US financial system. Efficient causality tests report indirect impact of the Russian financial system on Brazilian via auxiliary Indian financial system.

The present study is the first of its kind capturing linkages among the US-BRIC financial stress indices by using diverse econometric models. The results support different market participants and policymakers in understanding effectiveness and implementation of economic policies while considering their cross-market interactions as well.

The equation of unified knowledge says that S = f (A,P) which means that the practical solution to a given problem is a function of the existing, empirical, actual realities and the future, potential, best possible conditions of general stable equilibrium which both pure and practical reason, exhaustive in the Kantian sense, show as being within the realm of potential realities beyond any doubt. The first classical revolution in economic thinking, included in factor “P” of the equation, conceived the economic and financial problems in terms of a model of ideal conditions of stable equilibrium but neglected the full consideration of the existing, actual conditions. That is the main reason why, in the end, it failed. The second modern revolution, included in factor “A” of the equation, conceived the economic and financial problems in terms of the existing, actual conditions, usually in disequilibrium or unstable equilibrium (in case of stagnation) and neglected the sense of right direction expressed in factor “P” or the realization of general, stable equilibrium. That is the main reason why the modern revolution failed in the past and is failing in front of our eyes in the present. The equation of unified knowledge, perceived as a sui generis synthesis between classical and modern thinking has been applied rigorously and systematically in writing the enclosed American‐British economic, monetary, financial and social stabilization plans. In the final analysis, a new economic philosophy, based on a synthesis between classical and modern thinking, called here the new economics of unified knowledge, is applied to solve the malaise of the twentieth century which resulted from a confusion between thinking in terms of stable equilibrium on the one hand and disequilibrium or unstable equilibrium on the other.

This study aims to critically review recent contributions to the methodology of financial economics and discuss how they relate to one another and directions for further research.

A critical review of recent literature on new methodologies for financial economics.

Recent books have made important contributions to the study of financial economics. They suggest new approaches that include an emphasis on radical uncertainty, adaptive markets, agent-based modeling and narrative economics, as well as extensions of behavioral finance to include concepts such as diagnostic expectations. Many of these contributions can be seen more as complements than substitutes and provide fruitful directions for further research. Efficient markets can be seen as holding under particular circumstances. A major them of most of these contributions is that the study of financial crises and other aspects of financial economics requires the use of multiple theories and approaches. No one approach will be sufficient.

There are great opportunities for further research in financial economics making use of these new approaches.

These recent contributions can be quite useful for improved analysis by researchers, private participants in the financial sector and macroeconomic and regulatory officials.

Provides an introduction to these new approaches and highlights fruitful areas for their extensions and applications.