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Tranquil and Crisis Windows, Heteroscedasticity, and Contagion Measurement: MS-VAR Application of the DCC Procedure

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  • Victor Pontines

    (Carnegie Mellon University, H. John Heinz III School of Public Policy and Management, Australia)

  • Reza Y. Siregar

    (School of Economics, University of Adelaide)

Abstract

The key objective of this study is to show that two potential shortcomings of the Determinant of Change in Covariance Matrix (DCC) procedure of Rigobon (2003), namely with the arbitrary determination of the windows, i.e., tranquil and crisis periods and the violation of its heteroscedasticity assumption under the null, can be simultaneously addressed via a simple incorporation of a Markov-Switching Vector Autoregressive (MS-VAR) approach into the overall DCC procedure. To demonstrate this, we revisit the period around the time of the East Asian crises using daily stock exchange of Indonesia, Malaysia, Philippines, Thailand, Singapore, Korea, Hong Kong and Taiwan and test whether there is a significant break or discontinuity in the stock exchange returns of the eight East Asian markets during crisis periods, especially around the time of the 1997 financial crises. In contrast to that of Rigobon (2003), our results show that the propagation of shocks shifted significantly starting with the onset of the sharp decline in the Hong Kong stock market.

Suggested Citation

  • Victor Pontines & Reza Y. Siregar, 2007. "Tranquil and Crisis Windows, Heteroscedasticity, and Contagion Measurement: MS-VAR Application of the DCC Procedure," School of Economics and Public Policy Working Papers 2007-02, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2007-02
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    Cited by:

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    2. Miriam Sosa & Edgar Ortiz & Alejandra Cabello, 2022. "ESG Green Equity Finance Risk and Links in Mexico: Conditional Volatility and Markov Switching Vector Analyses," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 17(4), pages 1-21, Octubre -.
    3. Xiao Jing Cai & Shuairu Tian & Shigeyuki Hamori, 2016. "Dynamic correlation and equicorrelation analysis of global financial turmoil: evidence from emerging East Asian stock markets," Applied Economics, Taylor & Francis Journals, vol. 48(40), pages 3789-3803, August.
    4. Sandoval Paucar, Giovanny, 2021. "A Conditional Correlation Analysis For The Colombian Stock Market," MPRA Paper 107963, University Library of Munich, Germany.
    5. Sandoval Paucar, Giovanny, 2018. "Contagio Financiero: Una Breve Revisión De Literatura [Financial Contagio: A Review Literature]," MPRA Paper 89554, University Library of Munich, Germany.
    6. Jayasuriya, Shamila A., 2011. "Stock market correlations between China and its emerging market neighbors," Emerging Markets Review, Elsevier, vol. 12(4), pages 418-431.
    7. Smimou, K. & Khallouli, W., 2016. "On the intensity of liquidity spillovers in the Eurozone," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 388-405.

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    More about this item

    Keywords

    contagion; Markov-switching vector autoregressive; determinant of the change in the covariance matrix; stock returns;
    All these keywords.

    JEL classification:

    • 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
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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