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Endogenous crisis dating and contagion using smooth transition structural GARCH

Detecting contagion during financial crises requires demarcation of crisis periods. This paper presents a method for endogeneous dating of both the start and finish of crises, coupled with the statistical detection of contagion effects. We couple smooth transition functions with structural GARCH to identify both features of markets in crisis, and provide conditions under which these eects will be identified. To illustrate we apply the framework to US financial returns in REITS, S&P500 and Treasury bonds indices over the period 2001 to 2010, and clearly identify four phases consistent with a pre-crisis period to October 2007, two phases of crisis up to and following late August 2008, and a post-crisis phase dating from June 2009. The evidence strongly supports changes in the transmission mechanisms of shocks between asset returns during the crisis, and particularly contagion from equity markets to REITS. The post-crisis period has not returned to pre-crisis relationships.

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File URL: http://eprints.utas.edu.au/15030/1/2012-03__DP_Dungey_et_al.pdf
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Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 15030.

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Length: 29 pages
Date of creation: 29 Aug 2012
Date of revision: 29 Aug 2012
Publication status: Published by the University of Tasmania. Discussion Paper 2012-03
Handle: RePEc:tas:wpaper:15030
Contact details of provider: Postal: Private Bag 85, Hobart, Tasmania 7001
Phone: +61 3 6226 7672
Fax: +61 3 6226 7587
Web page: http://www.utas.edu.au/economics-finance/

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  1. Frederic S. Mishkin, 2010. "Over The Cliff: From the Subprime to the Global Financial Crisis," NBER Working Papers 16609, National Bureau of Economic Research, Inc.
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  9. Francis X. Diebold & Kamil Yilmaz, 2010. "Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers," Koç University-TUSIAD Economic Research Forum Working Papers 1001, Koc University-TUSIAD Economic Research Forum, revised Mar 2010.
  10. 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.
  11. Granger, Clive W J, 1993. "Strategies for Modelling Nonlinear Time-Series Relationships," The Economic Record, The Economic Society of Australia, vol. 69(206), pages 233-38, September.
  12. 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.
  13. Milunovich George & Yang Minxian, 2013. "On Identifying Structural VAR Models via ARCH Effects," Journal of Time Series Econometrics, De Gruyter, vol. 5(2), pages 117-131, May.
  14. Renée Fry & Cody Yu-Ling Hsiao & Chrismin Tang, 2011. "Actually This Time Is Different," CAMA Working Papers 2011-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  15. Dungey, Mardi & Fry, Renee A. & Gonzalez-Hermosillo, Brenda & Martin, Vance L., 2011. "Transmission of Financial Crises and Contagion: A Latent Factor Approach," OUP Catalogue, Oxford University Press, number 9780199739837, March.
  16. Dungey, Mardi & Milunovich, George & Thorp, Susan, 2010. "Unobservable shocks as carriers of contagion," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1008-1021, May.
  17. Caporale, Guglielmo Maria & Cipollini, Andrea & Spagnolo, Nicola, 2005. "Testing for contagion: a conditional correlation analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 476-489, June.
  18. Renée Fry & Cody Yu-Ling Hsiao & Chrismin Tang, 2011. "Actually This Time Is Different," CAMA Working Papers 2011-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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