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Measuring Stock Market Contagion with an Application to the Sub-prime Crisis

  • Mark Mink
  • Jochen Mierau

We present a new method to examine financial contagion, defined as a sudden strengthening of shock transmission between financial markets. In particular, we develop a correlation-like measure of synchronicity between markets that is straightforward to implement while being insensitive to heteroskedasticity of market returns. In fact, synchronicity would perfectly coincide with the dynamic conditional correlation (DCC) coefficient if the latter could be calculated using the `true' models for the variance and covariance of the market returns. When analysing the 1997 East Asian crisis and the current sub-prime mortgage crisis, we find no evidence that stock market returns are more contagious during periods of turmoil than during tranquil times.�� �� �� �� �� �� �� �� �� �� ��Â

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 217.

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Date of creation: Jul 2009
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Handle: RePEc:dnb:dnbwpp:217
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  1. Kee-Hong Bae & G. Andrew Karolyi & Rene M. Stulz, 2001. "A new approach to measuring financial contagion," Proceedings 743, Federal Reserve Bank of Chicago.
  2. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
  3. René Garcia & Georges Tsafack, 2009. "Dependence Structure and Extreme Comovements in International Equity and Bond Markets," CIRANO Working Papers 2009s-21, CIRANO.
  4. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
  5. Martin, V. & Dungey & M., 2004. "Empirical Modelling of Contagion: A Review of Methodologies," Econometric Society 2004 Far Eastern Meetings 574, Econometric Society.
  6. 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.
  7. Toni Gravelle & Maral Kichian & James Morley, 2002. "Detecting shift-contagion in currency and bond markets," Computing in Economics and Finance 2002 58, Society for Computational Economics.
  8. 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.
  9. 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.
  10. Mervyn A. King & Sushil Wadhwani, 1989. "Transmission of Volatility Between Stock Markets," NBER Working Papers 2910, National Bureau of Economic Research, Inc.
  11. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  12. 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.
  13. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  14. Mark Mink & Jakob de Haan, 2012. "Contagion during the Greek Sovereign Debt Crisis," DNB Working Papers 335, Netherlands Central Bank, Research Department.
  15. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  16. Mark Mink, 2009. "Is Contagion in the Eye of the Beholder?," DNB Working Papers 234, Netherlands Central Bank, Research Department.
  17. Baur, Dirk G., 2012. "Financial contagion and the real economy," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2680-2692.
  18. Baur, Dirk G. & Fry, Renée A., 2009. "Multivariate contagion and interdependence," Journal of Asian Economics, Elsevier, vol. 20(4), pages 353-366, September.
  19. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  20. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
  21. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, 09.
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