Extremal dependence tests for contagion

Renee Fry-McKibbin and Cody Yu-Ling Hsiao

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

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 2008-09, 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.

Keywords: Co-skewness; Co-kurtosis; Co-volatility; Contagion testing; Extremal dependence; Financial crisis; Lagrange multiplier tests. (search for similar items in EconPapers)
JEL-codes: C12 F30 G11 G21 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-11
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Journal Article: Extremal dependence tests for contagion (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2015-40

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