Measuring Stock Market Contagion with an Application to the Sub-prime Crisis
AbstractWe present a new method to examine financial contagion, defined as a sudden strengthening of shock transmission between financial markets. In particular, we develop a correlation-like measure of synchronicity between markets that is straightforward to implement while being insensitive to heteroskedasticity of market returns. In fact, synchronicity would perfectly coincide with the dynamic conditional correlation (DCC) coefficient if the latter could be calculated using the `true' models for the variance and covariance of the market returns. When analysing the 1997 East Asian crisis and the current sub-prime mortgage crisis, we find no evidence that stock market returns are more contagious during periods of turmoil than during tranquil times.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 217.
Date of creation: Jul 2009
Date of revision:
Contagion; Heteroskedasticity; Dynamic Conditional Correlation; Sub-prime Crisis; East Asian Crisis.;
Other versions of this item:
- Mierau, Jochen O. & Mink, Mark, 2013. "Are stock market crises contagious? The role of crisis definitions," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4765-4776.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-08 (All new papers)
- NEP-FMK-2009-08-08 (Financial Markets)
- NEP-SEA-2009-08-08 (South East Asia)
- NEP-URE-2009-08-08 (Urban & Real Estate Economics)
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