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Market linkages, variance spillovers and correlation stability: empirical evidences of financial contagion

Author

Listed:
  • Monica Billio

    () (Department of Economics, University Of Venice C� Foscari)

  • Massimiliano Caporin

    (Dipartimento di Scienze Economiche �Marco Fanno�, University of Padova)

Abstract

We propose a simultaneous equation system with GARCH errors to model the contemporaneous relations among Asian and American stock markets. On the estimated residuals, we evaluate the correlation matrix over rolling windows and introduce a correlation matrix distance, which allows both a graphical analysis and the development of a statistical test of correlation movements. Furthermore, we introduce a methodology that can be used for identifying turmoil periods on a data-driven basis. We employ the previous results in the analysis of the contagion issue between Asian and American stock markets. Our results shows some evidence of contagion and the proposed statistics identifies, on a data-driven basis, turmoil periods consistent with the ones currently assumed in the literature.

Suggested Citation

  • Monica Billio & Massimiliano Caporin, 2007. "Market linkages, variance spillovers and correlation stability: empirical evidences of financial contagion," Working Papers 2007_18, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2007_18
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial market contagion; Market linkages; Variance spillovers; Dynamic correlations; Rolling correlations; Transformed correlations;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F3 - International Economics - - International Finance
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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