On the study of contagion in the context of the subprime crisis: A dynamic conditional correlation–multivariate GARCH approach

This paper investigates the contagion hypothesis for ten developed and emerging stock markets (France, Italy, UK, Japan, China, Argentina, Mexico, Tunisia, Morocco and Egypt) with respect to the US market in the context of the subprime crisis. In order to capture further time-variation in contagion effects and dynamic linkages between stock markets, our paper makes use of a DCC–MGARH model. Our findings make two interesting contributions to the field. First, we highlighted an increase in dynamic correlations following the subprime crisis for most markets under consideration with regard to the U.S. market. Second, with respect to the contagion test by Forbes and Rigobon (2002) that associates “pure” contagion with a significantly higher correlation between markets during the crisis, our results showed that the “pure” contagion hypothesis is not rejected for France, Italy, the UK or Mexico at the level of 1%, and for Argentina at 10%. Simple interdependence with the US market characterizes the other markets. Our findings thus offer interesting insights in terms of investment and diversification, and offer further insights into systemic risk in these regions.