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Copula contagion index and its efficiency

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  • Ke Cheng
  • Fengbin Lu
  • Xiaoguang Yang

Abstract

A Copula Contagion Index (CCI) is established to measure financial contagion, based on the time-varying copula function. Empirical studies performed on the crisis spillover of US Subprime Mortgage Crisis demonstrate the efficiency of CCI. The empirical results from event study, change-point analysis, logitistic/probit regressions and the detection of the lead--lag relations by Baba, Engle, Kraft and Kroner (BEKK)-Vector Autoregressive (VAR)-Generalized Autoregressive Conditional Heteroscedastic (GARCH) model show that, the index is efficient in detecting the financial contagions. Sensitivity analysis indicates that the index is robust. Besides, empirical results indicate that the developed markets rather than the emerging markets suffered more severely and quickly from the US subprime mortgage crisis.

Suggested Citation

  • Ke Cheng & Fengbin Lu & Xiaoguang Yang, 2012. "Copula contagion index and its efficiency," Applied Financial Economics, Taylor & Francis Journals, vol. 22(12), pages 989-1002, June.
  • Handle: RePEc:taf:apfiec:v:22:y:2012:i:12:p:989-1002
    DOI: 10.1080/09603107.2011.633889
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    References listed on IDEAS

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    1. Mardi Dungey & Diana Zhumabekova, 2001. "Testing for contagion using correlations: some words of caution," Pacific Basin Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
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