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Endogenous Crisis Dating and Contagion Using Smooth Transition Structural GARCH

Author

Listed:
  • Mardi Dungey

    (School of Economics and Finance, University of Tasmania)

  • George Milunovich

    (Department of Economics, Macquarie University)

  • Susan Thorp

    (University of Sydney)

  • Minxian Yang

    (School of Economics, University of New South Wales)

Abstract

Detecting contagion during financial crises requires demarcation of crisis periods. This paper presents a method for endogenous dating of both the start and finish of crises, coupled with the statistical detection of contagion effects. We couple smooth transition functions with structural GARCH to identify both features of markets in crisis, and provide conditions under which these effects will be identified. To illustrate we apply the framework to US financial returns in REITS, S&P500 and Treasury bonds indices over the period 2001 to 2010, and clearly identify four phases consistent with a pre-crisis period to October 2007, two phases of crisis up to and following late August 2008, and a post-crisis phase dating from June 2009. The evidence strongly supports changes in the transmission mechanisms of shocks between asset returns during the crisis, and particularly contagion from equity markets to REITS. The post-crisis period has not returned to pre-crisis relationships.

Suggested Citation

  • Mardi Dungey & George Milunovich & Susan Thorp & Minxian Yang, 2012. "Endogenous Crisis Dating and Contagion Using Smooth Transition Structural GARCH," Research Paper Series 312, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:312
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    Keywords

    contagion; structural GARCH; global financial crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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