A NEW CLASS OF TESTS OF CONTAGION WITH APPLICATIONS TO REAL ESTATE MARKETS

Renee Fry-McKibbin, Vance Martin and Chrismin Tang

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: A new class of tests of contagion is proposed which identifies transmission channels of financial market crises through changes in higher order moments of the distribution of returns such as coskewness. Applying the framework to test for contagion in real estate and equity markets following the Hong Kong crisis in 1997-1998 and the US subprime mortgage crisis in 2007 shows that the coskewness based tests of contagion detect additional channels that are not identified by the correlation based tests. Implications of contagion in pricing exchange options where there is a change in higher order comoments of returns on the underlying assets, are also investigated.

Pages: 66 PAGES
Date: 2008-02
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