Detecting and dating possibly distinct structural breaks in the covariance structure of financial assets

Farah Mugrabi

No 2023001, LIDAM Discussion Papers LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: This paper aims to identify and date contagion by accounting for possibly distinct structural breaks among the covariance structure of financial assets. We propose an efficient three-steps procedure that applies the Lagrange Multiplier test, in particular the SupLM statistic, among the DCC-GARCH model parameters. Monte Carlo experiments show that our procedure possess good power and accurately detects the location of the true breaking points. We explore contagion between the government bond and stock markets of advanced and emerging economies. Evidence of common shifts in the covariance structure coincides with the European Sovereign Debt Crisis, the Taper Tantrum originated in United States in mid-2013 and the Covid-19 pandemic.

Keywords: Contagion; emerging markets; unknown structural breaks; Lagrange Multiplier test; DCC-GARCH model (search for similar items in EconPapers)
JEL-codes: C15 C32 G15 (search for similar items in EconPapers)
Pages: 45
Date: 2023-03-01
New Economics Papers: this item is included in nep-ecm and nep-ets
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