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Testing for financial contagion based on a nonparametric measure of the cross‐market correlation

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  • Fuchun Li
  • Hui Zhu

Abstract

When contagion is defined as a significant increase in market comovement after a shock to one country, we propose a test for financial contagion based on a nonparametric measure of the cross‐market correlation. Monte Carlo simulation studies show that our test has reasonable size and good power to detect financial contagion, and that Forbes and Rigobon's test (2002) is relatively conservative, indicating that their test tends not to find evidence of contagion when it does exist. Applying our test to investigate contagion from the 1997 East Asian crisis and the 2007 Subprime crisis, we find that there existed international financial contagion from the two financial crises.

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  • Fuchun Li & Hui Zhu, 2014. "Testing for financial contagion based on a nonparametric measure of the cross‐market correlation," Review of Financial Economics, John Wiley & Sons, vol. 23(3), pages 141-147, September.
    • Handle: RePEc:wly:revfec:v:23:y:2014:i:3:p:141-147
    DOI: 10.1016/j.rfe.2014.05.001
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    References listed on IDEAS

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    1. Markwat, Thijs & Kole, Erik & van Dijk, Dick, 2009. "Contagion as a domino effect in global stock markets," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1996-2012, November.
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    3. Zhang, Yi & Zhou, Long & Chen, Yajiao & Liu, Fang, 2022. "The contagion effect of jump risk across Asian stock markets during the Covid-19 pandemic," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).

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