Supervisors: prof. Tiiu Paas (PhD), Tartu Ülikool
Opponents: prof. Armin Rohde (PhD), Greifswaldi Ülikool, Saksamaa,
vanemteadur Kadri Männasoo (PhD), Tallinna Tehnikaülikool
The aim of the study is to find out whether the propagation of financial crises in numerous past crisis episodes has been amplified by financial contagion or is based solely on stable fundamental linkages between countries. It is shown that because of the multidimensionality of the research problem literature reviews and even more so individual studies do not provide sufficient answers to the financial contagion puzzle. Therefore, one contribution of the thesis is to suggest future research be conducted on the field of financial contagion with more emphasis on finding singular numerical values that are interpretable and comparable, and therefore, summarisable across all relevant studies, rather than trying to come out with some statistical significance measure of some contagion parameter. One potential measure of this kind is proposed in the theoretical part of the thesis and is used in the following empirical analysis. The empirical findings indicate that some contagion has been present in recent crisis episodes but these effects have been rather moderate. The contagiousness of transmission of crises varies depending on observed crisis and financial market but not significantly on development level of destination countries. An important policy implication from the results of the thesis is that potential benefits from international portfolio diversification are significantly lower than one might expect. If one country falls, others are not safe either, as herding behaviour or some other form of collectively irrational behaviour among financial agents can easily occur. At the government level, some guidelines for appropriate financial architecture that take into account the presence of financial contagion in international markets can be drawn. As closeting themselves behind iron curtains seems neither realistic nor reasonable, nothing more than countries putting aside financial reserves during good times for use when financial contagion hits can really be suggested.