Contagion versus flight to quality in financial markets
None doubts that financial markets are related (interdependent). What is not so clear is whether there exists contagion among them or not, its intensity, and its causal direction. The aim of this paper is to define properly the term contagion (different from interdependence) and to present a formal test for its existence, the magnitude of its intensity, and for its direction. Our definition of contagion lies on tail dependence measures and it is made operational through its equivalence with some copula properties. In order to do that, we define a NEW copula, a variant of the Gumbel type, that is sufficiently flexible to describe different patterns of dependence, as well as being able to model asymmetric effects of the analyzed variables (something not allowed with the standard copula models). Finally, we estimate our copula model to test the intensity and the direction of the extreme causality between bonds and stocks markets (in particular, the flight to quality phenomenon) during crises periods. We find evidence of a substitution effect between Dow Jones Corporate Bonds Index with 2 years maturity and Dow Jones Stock Price Index when one of them is through distress periods. On the contrary, if both are going through crises periods a contagion effect is observed. The analysis of the corresponding 30 years maturity bonds with the stock market reflects independent effects of the shocks.
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.:
- Granger, Clive W.J. & TerÃ¤svirta, Timo & Patton, Andrew J, 2002.
"Common Factors in Conditional Distributions,"
University of California at San Diego, Economics Working Paper Series
qt3bd1n1x5, Department of Economics, UC San Diego.
- Granger, Clive W.J. & Teräsvirta, Timo & Patton, Andrew J., 2002. "Common factors in conditional distributions," SSE/EFI Working Paper Series in Economics and Finance 515, Stockholm School of Economics.
- de Vries, Casper G & Hartmann, Philipp & Straetmans, Stefan, 2001.
"Asset Market Linkages in Crisis Periods,"
CEPR Discussion Papers
2916, C.E.P.R. Discussion Papers.
- Hartmann, P. & Straetmans, S. & De Vries, C.G., 2001. "Asset Market Linkages in Crisis Periods," Papers 71, Quebec a Montreal - Recherche en gestion.
- Philipp Hartman & Stefan Straetmans & Casper De Vries, 2001. "Asset market linkages in crisis periods," Proceedings 727, Federal Reserve Bank of Chicago.
- Hartmann, Philipp & Straetmans, Stefan & de Vries, Casper, 2001. "Asset market linkages in crisis periods," Working Paper Series 0071, European Central Bank.
- P. Hartmann & S. Straetmans & C.G. de Vries, 2001. "Asset Market Linkages in Crisis Periods," Tinbergen Institute Discussion Papers 01-071/2, Tinbergen Institute.
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
- Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005.
"'Some contagion, some interdependence': More pitfalls in tests of financial contagion,"
Journal of International Money and Finance,
Elsevier, vol. 24(8), pages 1177-1199, December.
- 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.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
- Kristin Forbes & Roberto Rigobon, 1999.
"No Contagion, Only Interdependence: Measuring Stock Market Co-movements,"
NBER Working Papers
7267, National Bureau of Economic Research, Inc.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we051810. 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: (Ana Poveda)
If references are entirely missing, you can add them using this form.