A Regime Switching Skew-normal Model for Measuring Financial Crisis and Contagion

Joshua Chan, Cody Yu-Ling Hsiao and Renee Fry-McKibbin

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: A regime switching skew-normal model for financial crisis and contagion is proposed in which we develop a new class of multiple-channel crisis and contagion tests. Crisis channels are measured through changes in ‘own’ moments of the mean, variance and skewness, while contagion is through changes in the covariance and co-skewness of the joint distribution of asset returns. In this framework: i) linear and non-linear dependence is allowed; ii) transmission channels are simultaneously examined; iii) crisis and contagion are distinguished and individually modeled; iv) the market that a crisis originates is endogenous; and v) the timing of a crisis is endogenous. In an empirical application, we apply the proposed model to equity markets during the Great Recession using Bayesian model comparison techniques to assess the multiple channels of crisis and contagion. The results generally show that crisis and contagion are pervasive across Europe and the US. The second moment channels of crisis and contagion are systematically more evident than the first and third moment channels.

Keywords: Great Recession; Crisis tests; Contagion tests; Co-skewness; Regime switching skew-normal model; Gibbs sampling; Bayesian model comparison (search for similar items in EconPapers)
JEL-codes: C11 C34 G15 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2013-03
New Economics Papers: this item is included in nep-ban, nep-ecm and nep-ets
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2013-15

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