A Regime Switching Skew-normal Model for Measuring Financial Crisis and Contagion
AbstractA regime switching skew-normal model for financial crisis and contagion is proposed in which we develop a new class of multiple-channel crisis and contagion tests. Crisis channels are measured through changes in 'own' moments of the mean, variance and skewness, while contagion is through changes in the covariance and co-skewness of the joint distribution of asset returns. In this framework: i) linear and non-linear dependence is allowed; ii) transmission channels are simultaneously examined; iii) crisis and contagion are distinguished and individually modeled; iv) the market that a crisis originates is endogenous; and v) the timing of a crisis is endogenous. In an empirical application, we apply the proposed model to equity markets during the Great Recession using Bayesian model comparison techniques to assess the multiple channels of crisis and contagion. The results generally show that crisis and contagion are pervasive across Europe and the US. The second moment channels of crisis and contagion are systematically more evident than the first and third moment channels.
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Bibliographic InfoPaper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-15.
Length: 69 pages
Date of creation: Mar 2013
Date of revision:
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More information through EDIRC
Great Recession; Crisis tests; Contagion tests; Co-skewness; Regime switching skew-normal model; Gibbs sampling; Bayesian model comparison;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-24 (All new papers)
- NEP-BAN-2013-05-24 (Banking)
- NEP-ECM-2013-05-24 (Econometrics)
- NEP-ETS-2013-05-24 (Econometric Time Series)
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