Tag: financial crisis

How spillovers propagate among energy commodities during business-as-usual scenarios and crisis episodes, differentiating between short- and long-term effects

Posted on | by Marta Re Ferrè

Fossil fuels dominate the transmission of shocks along the energy supply chain, with effects amplified during crises. A study examines how these spillovers affect commodity markets and highlights the importance of mitigation strategies to contain instability.

 

Fossil fuels often act as primary spillover transmitters to energy derivatives, with the interconnectedness among commodities intensifying significantly during energy crises.

A recent study published in the International Review of Financial Analysis by Mattia Chiappari, Francesco Scotti, and Andrea Flori from POLIMI School of Management of Politecnico di Milano analyzes the dynamics of shock transmission within energy commodities describing how spillovers impact commodities along the supply chain.

The study has two main goals: first, to determine if upstream fossil fuels, such as oil, natural gas, and coal, or downstream derivatives, such as gasoline, heating oil, and ethanol, are dominant in shock transmission; and second, to evaluate if these effects vary based on market conditions, especially in times of crisis like the 2014-2015 Global Commodity Crisis, the COVID-19 pandemic, the Russia-Ukraine conflict, and the Israeli-Palestinian conflict.

Findings reveal that fossil fuels are typically the primary transmitters of shocks, while derivatives usually act as receivers, absorbing fluctuations. However, in times of severe crisis, even derivatives can shift roles and become transmitters, amplifying the impact across commodity markets. Within commodities, the oil supply chain drives the spillover transmission. Notably, the analysis of short-term shock frequencies shows that energy commodity markets can absorb shocks within few days, underscoring the efficiency with which these markets incorporate new information.

Key Insights:

– Fossil fuels play a pivotal role in transmitting market shocks, particularly during periods of crisis.

– Energy derivatives, by contrast, mainly absorb shocks but can amplify them during extreme market instability.

– The efficiency of energy markets in shock management opens potential strategies for mitigating the impacts of market crises.

 

For further insights, the full article is available here: https://www.sciencedirect.com/science/article/pii/S1057521924005970?via%3Dihub

How financial crises reshape global supply networks: lessons from the global financial crisis of the late 2000s

Posted on | by Marta Re Ferrè

Financial crises not only damage the economies which are directly hit, but they also spread by altering multinational production networks, with lasting global effects.

 

Financial crises have significant, negative, and lasting impacts on economic activity, leading to sharp declines in output, credit, and employment. These effects extend beyond the countries directly affected by the crisis, spreading through the activities of multinational firms within global production networks. These networks can act as transmission channels, as the shock spreads across subsidiaries in countries with varying levels of exposure to the financial crisis. Additionally, the reorganization of a multinational’s network following a financial shock may further propagate the crisis.

A study of Giulia Felice, Professor of International Economics at the School of Management of the Politecnico di Milano, joint with Sergi Basco, Bruno Merlevede, and Martì Mestieri, examines how multinational enterprises may facilitate the spread of financial crises across countries.

Published in the Journal of International Economics, the research focuses on European multinational networks during the Global Financial Crisis of the late 2000s. It investigates how the shock altered the structure of multinational production networks, affecting parent companies’ performance and their decisions regarding subsidiaries in subsequent years.

The study is based on a novel dataset tracking the evolution of European multinational enterprises (MNEs) and their networks from 2003 to 2015, approximately 18,000 multinational networks. The authors show that subsidiaries can be dropped from production networks even if their country is not directly hit. At the same time, parent companies may suffer losses in revenue and employment if their subsidiaries are located in financially impacted regions. In the period 2006-2015, networks experiencing a larger shock grew less, became more localized (with reduced distances between parent companies and affiliates, and among affiliates), and parent companies tended to relocate subsidiaries away from peripheral regions. Moreover, the business complexity of these networks decreased.

The study also highlights the critical role of credit constraints, and therefore the importance of a country’s financial system, in driving these effects. The negative impact was more pronounced for parent companies with higher leverage before the crisis and was exacerbated in financially dependent industries and among more leveraged affiliates.

Given the recurring nature of financial crises, understanding how they affect global supply chains and their broader economic implications is crucial. The reorganization of multinational production networks due to financial shocks can indeed have long-term effects on production efficiency, innovation diffusion, and employment in both affected and distant countries.

 

To read the complete article:
Financial crises and the global supply network: Evidence from multinational enterprises

To read the summary of the article: VOX-EU.