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

  • Monica Billio

    ()

    (Department of Economics, University Of Venice Cà Foscari)

  • Massimiliano Caporin

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

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.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2007/WP_DSE_billio_caporin_18_07.pdf
File Function: First version, 2007
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Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2007_18.

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Length: 35
Date of creation: 2007
Date of revision:
Handle: RePEc:ven:wpaper:2007_18
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  1. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
  2. Reuven Glick & Andrew K. Rose, 1998. "Contagion and Trade: Why Are Currency Crises Regional?," NBER Working Papers 6806, National Bureau of Economic Research, Inc.
  3. Roberto Rigobon, 2001. "Contagion: How to Measure It?," NBER Working Papers 8118, National Bureau of Economic Research, Inc.
  4. Mardi Dungey & Renee Fry & Vance Martin & Brenda González-Hermosillo, 2004. "Empirical Modeling of Contagion; A Review of Methodologies," IMF Working Papers 04/78, International Monetary Fund.
  5. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," World Bank Research Observer, World Bank Group, vol. 15(2), pages 177-97, August.
  6. 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.
  7. Giampiero Gallo & Edoardo Otranto, 2007. "Volatility Spillovers, Interdependence and Comovements: A Markov Switching Approach," Econometrics Working Papers Archive wp2007_11, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
  8. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers 3310, C.E.P.R. Discussion Papers.
  9. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
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  11. Hashem Pesaran & Andreas Pick, 2004. "Econometric Issues in the Analysis of Contagion," Money Macro and Finance (MMF) Research Group Conference 2004 67, Money Macro and Finance Research Group.
  12. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
  13. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
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  15. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
  16. Dungey, Mardi & Tambakis, Demosthenes N. (ed.), 2005. "Identifying International Financial Contagion: Progress and Challenges," OUP Catalogue, Oxford University Press, number 9780195187182, March.
  17. Shiqing Ling & Michael McAleer, 2001. "Asymptotic Theory for a Vector ARMA-GARCH Model," ISER Discussion Paper 0549, Institute of Social and Economic Research, Osaka University.
  18. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
  19. Billio, Monica & Pelizzon, Loriana, 2003. "Contagion and interdependence in stock markets: Have they been misdiagnosed?," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 405-426.
  20. 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, 09.
  21. Grubel, Herbert G & Fadner, Kenneth, 1971. "The Interdependence of International Equity Markets," Journal of Finance, American Finance Association, vol. 26(1), pages 89-94, March.
  22. Geert Bekaert & Robert J. Hodrick, 1991. "Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," NBER Working Papers 3790, National Bureau of Economic Research, Inc.
  23. Matteo Ciccarelli & Alessandro Rebucci, 0. "Measuring contagion and interdependence with a Bayesian time-varying coefficient model: An application to the Chilean FX market during the Argentine crisis," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 5(2), pages 285-320.
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