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Testing for contagion in US industry portfolios -- a four-factor pricing approach

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  • George Milunovich
  • Antony Tan

Abstract

We conduct an empirical investigation into the financial contagion hypothesis in the context of 12 US industry portfolios. Using a four-factor asset pricing model we measure contagion as the excess co-movement between idiosyncratic portfolio shocks, and test for an increase in the frequency of contagion during the 2007--2009 crisis sub-sample. We find evidence of 22 instances of financial contagion during the noncrisis sample period, and 21 such occurrences during the 2007--2009 crisis period, at the 5% level. It appears that the frequency of contagion remained steady or declined during the crisis for the industries that had a relatively high frequency of contagion prior to the crisis, but increased for those industries that had relatively few such incidences. Interestingly, the financial sector exhibited the least number of contagion instances across both crisis and noncrisis periods.

Suggested Citation

  • George Milunovich & Antony Tan, 2013. "Testing for contagion in US industry portfolios -- a four-factor pricing approach," Applied Financial Economics, Taylor & Francis Journals, vol. 23(1), pages 15-26, January.
  • Handle: RePEc:taf:apfiec:v:23:y:2013:i:1:p:15-26
    DOI: 10.1080/09603107.2012.699185
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    File URL: http://hdl.handle.net/10.1080/09603107.2012.699185
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    References listed on IDEAS

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    1. Geert Bekaert & Michael Ehrmann & Marcel Fratzscher & Arnaud J. Mehl, 2011. "Global Crises and Equity Market Contagion," NBER Working Papers 17121, National Bureau of Economic Research, Inc.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    3. 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.
    4. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
    2. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters,in: Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284 Edward Elgar Publishing.

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