Extremal dependence tests for contagion

Renée Fry-McKibbin, Cody Yu Ling Hsiao

Research output: Contribution to journalArticlepeer-review

47 Citations (Scopus)

Abstract

A new test for financial market contagion based on changes in extremal dependence defined as co-kurtosis and co-volatility is developed to identify the propagation mechanism of shocks across international financial markets. The proposed approach captures changes in various aspects of the asset return relationships such as cross-market mean and skewness (co-kurtosis) as well as cross-market volatilities (co-volatility). Monte Carlo experiments show that the tests perform well except for when crisis periods are short in duration. Small crisis sample critical values are calculated for use in this case. In an empirical application involving the global financial crisis of 2008–2009, the results show that significant contagion effects are widespread from the US banking sector to global equity markets and banking sectors through either the co-kurtosis or the co-volatility channels, reinforcing that higher order moments matter during crises.

Original languageEnglish
Pages (from-to)626-649
Number of pages24
JournalEconometric Reviews
Volume37
Issue number6
DOIs
Publication statusPublished - 3 Jul 2018
Externally publishedYes

Keywords

  • co-kurtosis
  • Co-skewness
  • co-volatility
  • contagion testing
  • extremal dependence
  • financial crisis
  • Lagrange multiplier tests

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