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Financial contagion: A local correlation analysis


  • Inci, A. Can
  • Li, H.C.
  • McCarthy, Joseph


Local correlation is used to examine financial contagion. We share the view of previous research that there is contagion from the U.S. spot equity market to that of Germany and Britain. In addition, we provide evidence to suggest contagion from the U.S. spot equity market to that of Japan and Hong Kong. Furthermore, we have detected contagion from U.S. futures to other futures markets. However, there is no reverse contagion from any of the German, British, Japanese, and Hong Kong spot or index futures markets to those of the U.S. The results have international diversification, portfolio management, and within-industry implications.

Suggested Citation

  • Inci, A. Can & Li, H.C. & McCarthy, Joseph, 2011. "Financial contagion: A local correlation analysis," Research in International Business and Finance, Elsevier, vol. 25(1), pages 11-25, January.
  • Handle: RePEc:eee:riibaf:v:25:y:2011:i:1:p:11-25

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    References listed on IDEAS

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    10. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
    11. Ng, Angela, 2000. "Volatility spillover effects from Japan and the US to the Pacific-Basin," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 207-233, April.
    12. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
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    16. J. Barkley Rosser, 2009. "Introduction," Chapters,in: Handbook of Research on Complexity, chapter 1 Edward Elgar Publishing.
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    Cited by:

    1. Ng, Andrew Cheuk-Yin & Li, Johnny Siu-Hang & Chan, Wai-Sum, 2011. "Modeling investment guarantees in Japan: A risk-neutral GARCH approach," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 20-26, January.
    2. Tjøstheim, Dag & Hufthammer, Karl Ove, 2013. "Local Gaussian correlation: A new measure of dependence," Journal of Econometrics, Elsevier, vol. 172(1), pages 33-48.
    3. Kemper, Kris & Lee, Allissa & Simkins, Betty J., 2012. "Diversification revisited," Research in International Business and Finance, Elsevier, vol. 26(2), pages 304-316.
    4. Wild, Joerg, 2016. "Efficiency and risk convergence of Eurozone financial markets," Research in International Business and Finance, Elsevier, vol. 36(C), pages 196-211.
    5. Jessica James & Kristjan Kasikov & Kerry-Ann Edwards, 2012. "The end of diversification," Quantitative Finance, Taylor & Francis Journals, vol. 12(11), pages 1629-1636, November.
    6. Støve, Bård & Tjøstheim, Dag & Hufthammer, Karl Ove, 2014. "Using local Gaussian correlation in a nonlinear re-examination of financial contagion," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 62-82.


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