Measuring Financial Contagion with Extreme Coexceedances
AbstractThis paper tests for contagion firstly, within the Euro Area (EA thereafter), and secondly from the US to the EA. Using 'coexceedances' - the joint occurrences of extreme negative and positive returns in different countries in a given day - I define contagion within regions as the fraction of the coexceedances that cannot be explained by fundamentals (covariates). On the other hand, contagion across regions can be defined as the fraction of the coexceedance events in the EA that is left unexplained by its own covariates but that is explained by the exceedances from the US. Having applied a multinomial logistic regression model to daily returns on 14 European stock markets for the period 2004-2012, I can provide the following summary of the results. Firstly, I found evidence of contagion within the EA. Especially, the EA 10 year government bond yield and the EUR/USD exchange rate fail to adequately explain the probability of coexceedances in Europe. Therefore, these variables are important determinants of regional crashes. In addition, I have observed that negative movements in stock prices follow continuation patterns - coexceedances cluster across time. Secondly, there is no statistically significant evidence of contagion from the US to the EA, in the sense that US exceedances fail to explain high probabilities of coexceedances in the EA. This result holds under a large battery of robustness checks. I would rather interpret this as a normal interdependence between the two markets.
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Bibliographic InfoPaper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1112.
Length: 54 pages
Date of creation: Sep 2012
Date of revision:
Find related papers by JEL classification:
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
- NEP-CBA-2012-10-13 (Central Banking)
- NEP-EEC-2012-10-13 (European Economics)
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