Exploring Three-style Return Comovements and Contagion Using a Correlation Decomposition GARCH Model

EnDer Su, Ving-Vunk Mak and Po-Yuk So ()
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EnDer Su: National Kaohsiung University of Science and Technology
Ving-Vunk Mak: National Kaohsiung University of Science and Technology
Po-Yuk So: National Kaohsiung University of Science and Technology

Computational Economics, 2024, vol. 63, issue 6, No 7, 2305 pages

Abstract: Abstract Two types of contagion are evidenced using the proposed correlation decomposition GARCH model. The first comovement-driven contagion possesses both upward and downward comovements to bolster the correlation symmetrically. The excess effects of upward and downward comovements are close and symmetric on correlation increase to support the state of only interdependence, but not contagion. The second volatility-driven contagion goes along with the counter effect of downward comovements that is overtaken by the coherent effect of volatility during times of crisis. Due to the counter excess effect, the downward comovements are a catalyst to facilitate the propaganda of contagion risk and they do not dominate the CoVaR.

Keywords: Correlation decomposition; Downward comovements; Counter excess effect; CoVaR (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10614-023-10405-3

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