Financial Contagion, Vulnerability and Information Flow: Empirical Identification
AbstractThis paper proposes a new approach to modelling financial transmission effects. In simultaneous systems of stock returns, fundamental shocks are identified through heteroscedasticity. The size of contemporaneous spillovers is determined in the fashion of smooth transition regression by the innovations' variances and (negative) signs, both representing typical crisis-related magnitudes. Thereby, contagion describes higher inward transmission in times of foreign crisis, whereas vulnerability is defined as increased susceptibility to foreign shocks in times of domestic turmoil. The application to major American stock indices confirms US dominance and demonstrates that volatility and sign of the equity returns significantly govern spillover size.
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Bibliographic InfoPaper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 431.
Date of creation: 10 Jul 2009
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Contagion; Vulnerability; Identification; Smooth Transition Regression;
Find related papers by 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
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-24 (All new papers)
- NEP-BAN-2010-07-24 (Banking)
- NEP-CFN-2010-07-24 (Corporate Finance)
- NEP-ECM-2010-07-24 (Econometrics)
- NEP-ETS-2010-07-24 (Econometric Time Series)
- NEP-IFN-2010-07-24 (International Finance)
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