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Does the U.S. exercise contagion on Italy? A theoretical model and empirical evidence

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  • Cerqueti, Roy
  • Fenga, Livio
  • Ventura, Marco

Abstract

This paper deals with the theme of contagion in financial markets. At this aim, we develop a model based on Mixed Poisson Processes to describe the abnormal returns of financial markets of two considered countries. In so doing, the article defines the theoretical conditions to be satisfied in order to state that one of them – the so-called leader – exercises contagion on the others — the followers. Specifically, we employ an invariant probabilistic result stating that a suitable transformation of a Mixed Poisson Process is still a Mixed Poisson Process. The theoretical claim is validated by implementing an extensive simulation analysis grounded on empirical data. The countries considered are the U.S. (as the leader) and Italy (as the follower) and the period under scrutiny is very large, ranging from 1970 to 2014.

Suggested Citation

  • Cerqueti, Roy & Fenga, Livio & Ventura, Marco, 2018. "Does the U.S. exercise contagion on Italy? A theoretical model and empirical evidence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 499(C), pages 436-442.
    • Handle: RePEc:eee:phsmap:v:499:y:2018:i:c:p:436-442
    DOI: 10.1016/j.physa.2018.02.073
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    Cited by:

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    3. Fanelli, Viviana & Maddalena, Lucia, 2020. "A nonlinear dynamic model for credit risk contagion," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 174(C), pages 45-58.
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    More about this item

    Keywords

    Econophysics; Financial markets; Abnormal returns; Contagion; Mixed Poisson process;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

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