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Market linkages, variance spillovers, and correlation stability: Empirical evidence of financial contagion

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  • Billio, Monica
  • Caporin, Massimiliano

Abstract

To model the contemporaneous relationships among Asian and American stock markets, a simultaneous equation system with GARCH errors is introduced. In the estimated residuals, the correlation matrix is analyzed over rolling windows and using a correlation matrix distance, which allows a graphical analysis and the development of a statistical test of correlation movements. Furthermore, a methodology that can be used to identify turmoil periods on a data-driven basis is presented. The previous results are applied in the analysis of the contagion issue between Asian and American stock markets. The results show some evidence of contagion, and the proposed statistics identify, on a data-driven basis, turmoil periods consistent with the ones currently assumed in the literature.

Suggested Citation

  • Billio, Monica & Caporin, Massimiliano, 2010. "Market linkages, variance spillovers, and correlation stability: Empirical evidence of financial contagion," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2443-2458, November.
    • Handle: RePEc:eee:csdana:v:54:y:2010:i:11:p:2443-2458
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F3 - International Economics - - International Finance
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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