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Financial market volatility and contagion effect: A copula–multifractal volatility approach

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  • Chen, Wang
  • Wei, Yu
  • Lang, Qiaoqi
  • Lin, Yu
  • Liu, Maojuan
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    Abstract

    In this paper, we propose a new approach based on the multifractal volatility method (MFV) to study the contagion effect between the U.S. and Chinese stock markets. From recent studies, which reveal that multifractal characteristics exist in both developed and emerging financial markets, according to the econophysics literature we could draw conclusions as follows: Firstly, we estimate volatility using the multifractal volatility method, and find out that the MFV method performs best among other volatility models, such as GARCH-type and realized volatility models. Secondly, we analyze the tail dependence structure between the U.S. and Chinese stock market. The estimated static copula results for the entire period show that the SJC copula performs best, indicating asymmetric characteristics of the tail dependence structure. The estimated dynamic copula results show that the time-varying t copula achieves the best performance, which means the symmetry dynamic t copula is also a good choice, for it is easy to estimate and is able to depict both the upper and lower tail dependence structure. Finally, with the results of the previous two steps, we analyze the contagion effect between the U.S. and Chinese stock markets during the subprime mortgage crisis. The empirical results show that the subprime mortgage crisis started in the U.S. and that its stock market has had an obvious contagion effect on the Chinese stock market. Our empirical results should/might be useful for investors allocating their portfolios.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 398 (2014)
    Issue (Month): C ()
    Pages: 289-300

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    Handle: RePEc:eee:phsmap:v:398:y:2014:i:c:p:289-300

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Multifractal volatility; Copula; Contagion effect; Subprime mortgage crisis;

    References

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