Testing For Asset Market Linkages: A New Approach Based On Time-Varying Copulas
This paper proposes a new approach based on time-varying copulas to test for the presence of increases in stock market interdependence (also known as shift contagion) after a financial crisis. We discuss the importance of considering simultaneously separate breaks in volatility and dependence. Without such consideration, the contagion test turns out to be biased. A sequential algorithm is proposed to tackle this problem. Applied to the recent 1997 Asian crisis, the analysis confirms that breaks in variances always precede those in the dependence parameter. Moreover, a significant 'J-shape' evolution of the dependence parameter is detected, supporting the idea of shift contagion. Copyright 2010 The Authors. Journal compilation 2010 Blackwell Publishing Asia Pty Ltd
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Volume (Year): 15 (2010)
Issue (Month): 3 (August)
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