Modeling financial contagion: approach-based on asymmetric cointegration

Lazeni Fofana and Françoise Seyte

Working Papers from LAMETA, Universtiy of Montpellier

Abstract: We analyze the financial contagion using an approach based on cointégration with asymmetric adjustment TAR and M-TAR. To capture the contagion effect, we consider regime change in the adjustment of the error correction term. We have introduced Threshold Autoregressive model (TAR) and Momentum Threshold Autoregressive model (M TAR) in adjustment mechanism of the error correction model with assumption that the error term exhibits self-excite jump. Our empirical study required the selection of four markets indices such as the CAC40, the FTSE 100, the S&P500 and NIKKEI225. We used these markets to understand the mechanism of shock propagation during the 2007 crisis. The results demonstrate the transmission of shocks by pure contagion from the S&P500 to FTSE100 and the CAC40. In contrast, we found a shocks transmission in the bond of interdependence from the S&P500 to NIKKEI225.

Pages: 26 pages
Date: 2012-06, Revised 2012-06
New Economics Papers: this item is included in nep-cba and nep-ecm
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Persistent link: https://EconPapers.repec.org/RePEc:lam:wpaper:12-21

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