IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Dynamic correlation analysis of US financial crisis and contagion: evidence from four OECD countries

  • Hong-Ghi Min
  • Young-Soon Hwang

By analysing the Dynamic Conditional Correlations (DCC) of the daily stock returns of four OECD countries with that of the US for the period 2006--2010, we could find a process of increasing correlations (contagion) in the first phase of the US financial crisis and an additional increase of correlations (herding) during the second phase of the US financial crisis for the UK, Australia and Switzerland. However, the impact of the US financial crisis on Japan was limited to the increase in correlation volatilities in the first phase. We also propose a new approach (DCC Multivariate Generalized Autoregressive Conditional Heteroscedastic model with Exogenous variables (DCCX-MGARCH)) that allows simultaneous estimation of the DCC and their determinants, which can be used to identify channels of contagion. It is shown that an increase in VIX stock market index increases conditional correlations but an increase in the TED spread and relative stock market capitalization decrease conditional correlations of stock returns between four OECD countries and the US.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 22 (2012)
Issue (Month): 24 (December)
Pages: 2063-2074

in new window

Handle: RePEc:taf:apfiec:v:22:y:2012:i:24:p:2063-2074
Contact details of provider: Web page:

Order Information: Web:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Mervyn A. King & Sushil Wadhwani, 1989. "Transmission of Volatility Between Stock Markets," NBER Working Papers 2910, National Bureau of Economic Research, Inc.
  2. Magnus Andersson & Elizaveta Krylova & Sami Vahamaa, 2007. "Why does the correlation between stock and bond returns vary over time?," Applied Financial Economics, Taylor & Francis Journals, vol. 18(2), pages 139-151.
  3. Charlotte Christiansen & Angelo Ranaldo, 2007. "Extreme Coexceedances in New EU Member States’ Stock Markets," CREATES Research Papers 2007-34, School of Economics and Management, University of Aarhus.
  4. Angelos Kanas, 1998. "Volatility spillovers across equity markets: European evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 245-256.
  5. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
  6. Froot, Kenneth A. & O'Connell, Paul G. J. & Seasholes, Mark S., 2001. "The portfolio flows of international investors," Journal of Financial Economics, Elsevier, vol. 59(2), pages 151-193, February.
  7. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
  8. Ritu Basu, 2002. "Financial Contagion and Investor "Learning": An Empirical Investigation," IMF Working Papers 02/218, International Monetary Fund.
  9. Lieven Baele & Geert Bekaert & Koen Inghelbrecht, 2007. "The determinants of stock and bond return comovements," Working Paper Research 119, National Bank of Belgium.
  10. Chiang, Thomas C. & Jeon, Bang Nam & Li, Huimin, 2007. "Dynamic correlation analysis of financial contagion: Evidence from Asian markets," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1206-1228, November.
  11. Nathaniel Frank & Heiko Hesse, 2009. "Financial Spillovers to Emerging Markets During the Global Financial Crisis," IMF Working Papers 09/104, International Monetary Fund.
  12. 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.
  13. Beirne, John & Caporale, Guglielmo Maria & Schulze-Ghattas, Marianne & Spagnolo, Nicola, 2009. "Volatility spillovers and contagion from mature to emerging stock markets," Working Paper Series 1113, European Central Bank.
  14. Kim, Suk-Joong & Moshirian, Fariborz & Wu, Eliza, 2006. "Evolution of international stock and bond market integration: Influence of the European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1507-1534, May.
  15. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers 3310, C.E.P.R. Discussion Papers.
  16. Chudik, Alexander & Fratzscher, Marcel, 2011. "Identifying the global transmission of the 2007-09 financial crisis in a GVAR Model," Working Paper Series 1285, European Central Bank.
  17. Connolly, Robert & Stivers, Chris & Sun, Licheng, 2005. "Stock Market Uncertainty and the Stock-Bond Return Relation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 161-194, March.
  18. William Cheung & Scott Fung & Shih-Chuan Tsai, 2010. "Global capital market interdependence and spillover effect of credit risk: evidence from the 2007-2009 global financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 85-103.
  19. Michael P. Dooley & Michael M. Hutchison, 2009. "Transmission of the U.S. Subprime Crisis to Emerging Markets: Evidence on the Decoupling-Recoupling Hypothesis," NBER Working Papers 15120, National Bureau of Economic Research, Inc.
  20. Connolly, Robert A. & Stivers, Chris & Sun, Licheng, 2007. "Commonality in the time-variation of stock-stock and stock-bond return comovements," Journal of Financial Markets, Elsevier, vol. 10(2), pages 192-218, May.
  21. Bordo, Michael D. & Murshid, Antu Panini, 2006. "Globalization and changing patterns in the international transmission of shocks in financial markets," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 655-674, June.
  22. Bracker, Kevin & Docking, Diane Scott & Koch, Paul D., 1999. "Economic determinants of evolution in international stock market integration," Journal of Empirical Finance, Elsevier, vol. 6(1), pages 1-27, January.
  23. Johnson, Robert & Soenen, Luc, 2003. "Economic integration and stock market comovement in the Americas," Journal of Multinational Financial Management, Elsevier, vol. 13(1), pages 85-100, February.
  24. Chudik, Alexander & Fratzscher, Marcel, 2011. "Identifying the global transmission of the 2007-2009 financial crisis in a GVAR model," European Economic Review, Elsevier, vol. 55(3), pages 325-339, April.
  25. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
  26. Nicole M. Boyson & Christof W. Stahel & René M. Stulz, 2010. "Hedge Fund Contagion and Liquidity Shocks," Journal of Finance, American Finance Association, vol. 65(5), pages 1789-1816, October.
  27. 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.
  28. Jorion, Philippe & Zhang, Gaiyan, 2007. "Good and bad credit contagion: Evidence from credit default swaps," Journal of Financial Economics, Elsevier, vol. 84(3), pages 860-883, June.
  29. Cai, Yijie & Chou, Ray Yeutien & Li, Dan, 2009. "Explaining international stock correlations with CPI fluctuations and market volatility," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2026-2035, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:22:y:2012:i:24:p:2063-2074. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.