Modelling Financial Markets Comovements during Crises: A Dynamic Multi-Factor Approach

Martin Belvisi, Riccardo Pianeti and Giovanni Urga

A chapter in Dynamic Factor Models, 2016, vol. 35, pp 317-360 from Emerald Group Publishing Limited

Abstract: We propose a novel dynamic factor model to characterise comovements between returns on securities from different asset classes from different countries. We apply a global-class-country latent factor model and allow time-varying loadings. We are able to separate contagion (asset exposure driven) and excess interdependence (factor volatility driven). Using data from 1999 to 2012, we find evidence of contagion from the US stock market during the 2007–2009 financial crisis, and of excess interdependence during the European debt crisis from May 2010 onwards. Neither contagion nor excess interdependence is found when the average measure of model implied comovements is used.

Keywords: Dynamic factor models; comovements; contagion; Kalman filter; autometrics; C3; C5; G1 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-905320150000035008

DOI: 10.1108/S0731-905320150000035008

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