Assessing stock market dependence and contagion

Omar Abbara and Mauricio Zevallos

Quantitative Finance, 2014, vol. 14, issue 9, 1627-1641

Abstract: This paper assesses evidence of the linkages and contagion among important stock markets in Latin America (Brazil, Mexico and Argentina), Europe (UK and Germany), Asia (Japan and Singapore) and the USA from 6 September 1995 to 19 April 2013. To accomplish this task, this paper combines copula modelling with time-varying parameters and pair-copula composition of multiple dependence. The bivariate analyses show an asymmetric dependence between the stock markets as well as contagion. In addition, this work proposes a method to assess the linkages and contagion between two stock markets which takes into account the effects of a third stock market. In applying this method, conditioned on the USA market, most of the evidence of contagion between the Latin American or European markets disappears, but important dependence levels still remain.

Date: 2014
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DOI: 10.1080/14697688.2013.859390

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