Testing financial contagion on heteroskedastic asset returns in time-varying conditional correlation

Kwang-il Choe, Pilsun Choi, Kiseok Nam and Farshid Vahid

Pacific-Basin Finance Journal, 2012, vol. 20, issue 2, 271-291

Abstract: We suggest that there is a significant relationship between cross-market comovement and time varying volatility. The time-varying component of cross-market dependence is attributed to the intertemporal risk-return adjustment by rational, risk-averse investors who systematically revise their expectation in response to changing volatility. To reflect the time-varying component of cross-market dependence, we propose a time-varying correlation test for contagion. Our results show that out of the countries reporting contagion evidence under the constant correlation test, none of the countries exhibits contagion evidence from the 1997 Asian crisis. We conclude that a high level of cross-market correlation during a crisis reported as contagion evidence under the standard constant correlation test is mostly due to the high level of cross-market co-movement resulting from the intertemporal risk-return adjustment.

Keywords: Financial contagion; Time-varying correlation test; Dynamic conditional correlation model; Cross-market co-movement (search for similar items in EconPapers)
JEL-codes: C40 C51 G14 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:20:y:2012:i:2:p:271-291

DOI: 10.1016/j.pacfin.2011.09.003

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