Testing for Stock Market Contagion: A Quantile Regression Approach

Sungyong Park, Wendun Wang and Naijing Huang ()
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Sungyong Park: Chung-Ang University, Seoul, Korea
Wendun Wang: Erasmus University Rotterdam, the Netherlands

No 15-040/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Regarding the asymmetric and leptokurtic behavior of financial data, we propose a new contagion test in the quantile regression framework that is robust to model misspecification. Unlike conventional correlation-based tests, the proposed quantile contagion test allows us to investigate the stock market contagion at various quantiles, not only at the mean. We show that the quantile contagion test can detect a contagion effect that is possibly ignored by correlation-based tests. A wide range of simulation studies show that the proposed test is superior to the correlation-based tests in terms of size and power. We compare our test with correlation-based tests using three real data sets: the 1994 Tequila crisis, the 1997 Asia crisis, and the 2001 Argentina crisis. Empirical results show substantial differences between two types of tests.

Keywords: Financial contagion; Quantile regression; One-sided score test (search for similar items in EconPapers)
JEL-codes: C21 C58 D53 (search for similar items in EconPapers)
Date: 2015-03-26
New Economics Papers: this item is included in nep-ecm and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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