Testing for Contagion: a Time-Scale Decomposition
AbstractThe aim of the paper is to test for ¯nancial contagion by estimating a simultaneous equation model subject to structural breaks. For this purpose, we use the Maximum Overlapping Discrete Wavelet Transform, MODWT, to decompose the covariance matrix of four asset returns on a scale by scale basis. This decomposition will enable us to identify the structural form model and to test for spillover e®ects between country speci¯c shocks during a crisis period. We distinguish between the case of the structural form model with a single dummy and the one with multiple dummies capturing shifts in the co-movement of asset returns occurring during periods of ¯nancial turmoil. The empirical results for four East Asian emerging stock markets show that, once we account for interdependence through an (unobservable) common factor, there is hardly any evidence of contagion during the 1997-1998 financial turbulence.
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Bibliographic InfoPaper provided by University of Modena and Reggio E., Dept. of Economics in its series Center for Economic Research (RECent) with number 047.
Length: pages 22
Date of creation: Jun 2010
Date of revision:
wavelets; simultaneous equations model; financial contagion;
Find related papers by JEL classification:
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-10 (All new papers)
- NEP-BAN-2010-07-10 (Banking)
- NEP-ECM-2010-07-10 (Econometrics)
- NEP-IFN-2010-07-10 (International Finance)
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Money Macro and Finance (MMF) Research Group Conference 2004
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- M. Hashem Pesaran & Andreas Pick, 2004. "Econometric Issues in the Analysis of Contagion," CESifo Working Paper Series 1176, CESifo Group Munich.
- Pesaran, M.H. & Pick, A., 2004. "Econometric Issues in the Analysis of Contagion," Cambridge Working Papers in Economics 0402, Faculty of Economics, University of Cambridge.
- Kristin J. Forbes & Roberto Rigobon, 2002.
"No Contagion, Only Interdependence: Measuring Stock Market Comovements,"
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- Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
- Dungey, Mardi & Milunovich, George & Thorp, Susan, 2010. "Unobservable shocks as carriers of contagion," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1008-1021, May.
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