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A Regime Switching Skew-normal Model for Measuring Financial Crisis and Contagion

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  • Joshua C.C. Chan
  • Cody Yu-Ling Hsiao
  • Renée A. Fry-McKibbin

Abstract

A 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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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2013/152013.pdf
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Bibliographic Info

Paper 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.

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Length: 69 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-15

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Keywords: Great Recession; Crisis tests; Contagion tests; Co-skewness; Regime switching skew-normal model; Gibbs sampling; Bayesian model comparison;

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  1. Maria Kasch & Massimiliano Caporin, 2008. "Volatility Threshold Dynamic Conditional Correlations: An International Analysis," "Marco Fanno" Working Papers, Dipartimento di Scienze Economiche "Marco Fanno" 0065, Dipartimento di Scienze Economiche "Marco Fanno".
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  12. Renée Fry & Cody Yu-Ling Hsiao & Chrismin Tang, 2011. "Actually This Time Is Different," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2011-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. Billio, Monica & Pelizzon, Loriana, 2003. "Contagion and interdependence in stock markets: Have they been misdiagnosed?," Journal of Economics and Business, Elsevier, Elsevier, vol. 55(5-6), pages 405-426.
  14. Kim, Chang-Jin & Piger, Jeremy & Startz, Richard, 2008. "Estimation of Markov regime-switching regression models with endogenous switching," Journal of Econometrics, Elsevier, Elsevier, vol. 143(2), pages 263-273, April.
  15. Sebastian Edwards, 1998. "Interest Rate Volatily, Contagion and Convergence: And Empirical Investigation of the Cases of Argentina, Chile and México," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 55-86, November.
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