IDEAS home Printed from https://ideas.repec.org/p/een/camaaa/2015-40.html
   My bibliography  Save this paper

Extremal dependence tests for contagion

Author

Listed:
  • Renée Fry-McKibbin
  • Cody Yu-Ling Hsiao

Abstract

A new test for financial market contagion based on changes in extremal dependence defined as co-kurtosis and co-volatility is developed to identify the propagation mechanism of shocks across international financial markets. The proposed approach captures changes in various aspects of the asset return relationships such as cross-market mean and skewness (co-kurtosis) as well as cross-market volatilities (co-volatility). Monte Carlo experiments show that the tests perform well except for when crisis periods are short in duration. Small crisis sample critical values are calculated for use in this case. In an empirical application involving the global financial crisis of 2008-09, the results show that significant contagion effects are widespread from the US banking sector to global equity markets and banking sectors through either the co-kurtosis or the co-volatility channels, reinforcing that higher order moments matter during crises.

Suggested Citation

  • Renée Fry-McKibbin & Cody Yu-Ling Hsiao, 2015. "Extremal dependence tests for contagion," CAMA Working Papers 2015-40, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2015-40
    as

    Download full text from publisher

    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2015-11/40_2015_fry-mckibbin_hsiao.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:taf:emetrv:v:37:y:2018:i:6:p:626-649 is not listed on IDEAS
    2. FrancisX. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    3. Renée Fry-McKibbin & Cody Hsiao & Chrismin Tang, 2014. "Contagion and Global Financial Crises: Lessons from Nine Crisis Episodes," Open Economies Review, Springer, vol. 25(3), pages 521-570, July.
    4. Jennifer Conrad & Robert F. Dittmar & Eric Ghysels, 2013. "Ex Ante Skewness and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 68(1), pages 85-124, February.
    5. Garcia, René & Tsafack, Georges, 2011. "Dependence structure and extreme comovements in international equity and bond markets," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1954-1970, August.
    6. Reint Gropp & Marco Lo Duca & Jukka Vesala, 2009. "Cross-Border Bank Contagion in Europe," International Journal of Central Banking, International Journal of Central Banking, vol. 5(1), pages 97-139, March.
    7. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
    8. Lionel Martellini & Volker Ziemann, 2010. "Improved Estimates of Higher-Order Comoments and Implications for Portfolio Selection," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1467-1502, April.
    9. Scott, Robert C & Horvath, Philip A, 1980. " On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, vol. 35(4), pages 915-919, September.
    10. Pesaran, M. Hashem & Pick, Andreas, 2007. "Econometric issues in the analysis of contagion," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1245-1277, April.
    11. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
    12. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    13. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    14. Robert F. Dittmar, 2002. "Nonlinear Pricing Kernels, Kurtosis Preference, and Evidence from the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 57(1), pages 369-403, February.
    15. Fabio Busetti & Andrew Harvey, 2011. "When is a Copula Constant? A Test for Changing Relationships," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(1), pages 106-131, Winter.
    16. Hwang, Soosung & Satchell, Stephen E, 1999. "Modelling Emerging Market Risk Premia Using Higher Moments," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(4), pages 271-296, October.
    17. Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, vol. 57(1), pages 231-246, June.
    18. Vayanos, Dimitri, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics 456, London School of Economics and Political Science, LSE Library.
    19. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    20. 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.
    21. Renée Fry-McKibbin & Cody Yu-Ling Hsiao, 2018. "Extremal dependence tests for contagion," Econometric Reviews, Taylor & Francis Journals, vol. 37(6), pages 626-649, July.
    22. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, June.
    23. Kraus, Alan & Litzenberger, Robert H, 1976. "Skewness Preference and the Valuation of Risk Assets," Journal of Finance, American Finance Association, vol. 31(4), pages 1085-1100, September.
    24. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
    25. Vaugirard, Victor, 2007. "Informational contagion of bank runs in a third-generation crisis model," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 403-429, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mahadeo, Scott M.R. & Heinlein, Reinhold & Legrenzi, Gabriella D., 2019. "Energy contagion analysis: A new perspective with application to a small petroleum economy," Energy Economics, Elsevier, vol. 80(C), pages 890-903.
    2. Renée Fry-McKibbin & Cody Yu-Ling Hsiao & Vance L. Martin, 2018. "Measuring financial interdependence in asset returns with an application to euro zone equities," CAMA Working Papers 2018-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Decision Sciences, Economics, Finance, Business, Computing, and Big Data: Connections," Tinbergen Institute Discussion Papers 18-024/III, Tinbergen Institute.
    4. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Big Data, Computational Science, Economics, Finance, Marketing, Management, and Psychology: Connections," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(1), pages 1-29, March.
    5. Renée Fry-McKibbin & Cody Yu-Ling Hsiao, 2018. "Extremal dependence tests for contagion," Econometric Reviews, Taylor & Francis Journals, vol. 37(6), pages 626-649, July.
    6. repec:bpj:sndecm:v:23:y:2019:i:1:p:24:n:3 is not listed on IDEAS
    7. repec:aag:wpaper:v:22:y:2018:i:1:p:36-94 is not listed on IDEAS
    8. Thomas Flavin & Dolores Lagoa-Varela, 2016. "Are Banking Shocks Contagious? Evidence from the Eurozone," Economics, Finance and Accounting Department Working Paper Series n268-16.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    9. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Big Data, Computational Science, Economics, Finance, Marketing, Management, and Psychology: Connections," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(1), pages 1-29, March.

    More about this item

    Keywords

    Co-skewness; Co-kurtosis; Co-volatility; Contagion testing; Extremal dependence; Financial crisis; Lagrange multiplier tests.;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:een:camaaa:2015-40. 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: (Cama Admin). General contact details of provider: http://edirc.repec.org/data/asanuau.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.