Modeling financial contagion using mutually exciting jump processes

Yacine Ait-Sahalia, Julio Cacho-Diaz and Roger Laeven

Journal of Financial Economics, 2015, vol. 117, issue 3, 585-606

Abstract: We propose a model to capture the dynamics of asset returns, with periods of crises that are characterized by contagion. In the model, a jump in one region of the world increases the intensity of jumps both in the same region (self-excitation) as well as in other regions (cross-excitation), generating episodes of highly clustered jumps across world markets that mimic the observed features of the data. We develop and implement moment-based estimation and testing procedures for this model. The estimates provide evidence of self-excitation both in the US and the other world markets, and of asymmetric cross-excitation, with the US market typically having more influence on the jump intensity of other markets than the reverse. We propose filtered values of the jump intensities as a measure of market stress and examine their out-of-sample forecasting abilities.

Keywords: Jumps; Contagion; Crisis; Hawkes process; Self- and mutually exciting processes (search for similar items in EconPapers)
JEL-codes: C32 C58 G01 G15 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (248)

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Related works:
Working Paper: Modeling Financial Contagion Using Mutually Exciting Jump Processes (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:117:y:2015:i:3:p:585-606

DOI: 10.1016/j.jfineco.2015.03.002

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