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Financial Contagion, Vulnerability and Information Flow: Empirical Identification

Enzo Weber

No 431, University of Regensburg Working Papers in Business, Economics and Management Information Systems from University of Regensburg, Department of Economics

Abstract: This paper proposes a new approach to modelling financial transmission effects. In simultaneous systems of stock returns, fundamental shocks are identified through heteroscedasticity. The size of contemporaneous spillovers is determined in the fashion of smooth transition regression by the innovations' variances and (negative) signs, both representing typical crisis-related magnitudes. Thereby, contagion describes higher inward transmission in times of foreign crisis, whereas vulnerability is defined as increased susceptibility to foreign shocks in times of domestic turmoil. The application to major American stock indices confirms US dominance and demonstrates that volatility and sign of the equity returns significantly govern spillover size.

Keywords: Contagion; Vulnerability; Identification; Smooth Transition Regression (search for similar items in EconPapers)
JEL-codes: C32 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-ecm, nep-ets and nep-ifn
Date: 2009-07-10
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