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Endogenous Crisis Dating and Contagion Using Smooth Transition Structural GARCH

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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.

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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 312.

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Length: 30
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:uts:rpaper:312

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Keywords: contagion; structural GARCH; global financial crisis;

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  1. Annastiina Silvennoinen & Timo Teräsvirta, 2008. "Modelling Multivariate Autoregressive Conditional Heteroskedasticity with the Double Smooth Transition Conditional Correlation GARCH Model," CREATES Research Papers 2008-05, School of Economics and Management, University of Aarhus.
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  14. 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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Cited by:
  1. Silvio Contessi & Pierangelo De Pace & Massimo Guidolin, 2013. "How did the financial crisis alter the correlations of U.S. yield spreads?," Working Papers 2013-005, Federal Reserve Bank of St. Louis.
  2. Dudek, Jérémy, 2013. "Illiquidité, contagion et risque systémique," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/13236 edited by Le Fol, Gaëlle, September.

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