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Modeling financial contagion: approach-based on asymmetric cointegration

Listed author(s):
  • Lazeni Fofana
  • Françoise SEYTE

We analyze the financial contagion using an approach based on cointégration with asymmetric adjustment TAR and M-TAR. To capture the contagion effect, we consider regime change in the adjustment of the error correction term. We have introduced Threshold Autoregressive model (TAR) and Momentum Threshold Autoregressive model (M TAR) in adjustment mechanism of the error correction model with assumption that the error term exhibits self-excite jump. Our empirical study required the selection of four markets indices such as the CAC40, the FTSE 100, the S&P500 and NIKKEI225. We used these markets to understand the mechanism of shock propagation during the 2007 crisis. The results demonstrate the transmission of shocks by pure contagion from the S&P500 to FTSE100 and the CAC40. In contrast, we found a shocks transmission in the bond of interdependence from the S&P500 to NIKKEI225.

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Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 12-21.

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Length: 26 pages
Date of creation: Jun 2012
Date of revision: Jun 2012
Handle: RePEc:lam:wpaper:12-21
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