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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, Tasmanian School of Business and Economics 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
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