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Exploring Three-style Return Comovements and Contagion Using a Correlation Decomposition GARCH Model

Author

Listed:
  • EnDer Su

    (National Kaohsiung University of Science and Technology)

  • Ving-Vunk Mak

    (National Kaohsiung University of Science and Technology)

  • Po-Yuk So

    (National Kaohsiung University of Science and Technology)

Abstract

Two types of contagion are evidenced using the proposed correlation decomposition GARCH model. The first comovement-driven contagion possesses both upward and downward comovements to bolster the correlation symmetrically. The excess effects of upward and downward comovements are close and symmetric on correlation increase to support the state of only interdependence, but not contagion. The second volatility-driven contagion goes along with the counter effect of downward comovements that is overtaken by the coherent effect of volatility during times of crisis. Due to the counter excess effect, the downward comovements are a catalyst to facilitate the propaganda of contagion risk and they do not dominate the CoVaR.

Suggested Citation

  • EnDer Su & Ving-Vunk Mak & Po-Yuk So, 2024. "Exploring Three-style Return Comovements and Contagion Using a Correlation Decomposition GARCH Model," Computational Economics, Springer;Society for Computational Economics, vol. 63(6), pages 2271-2305, June.
    • Handle: RePEc:kap:compec:v:63:y:2024:i:6:d:10.1007_s10614-023-10405-3
    DOI: 10.1007/s10614-023-10405-3
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