Market linkages, variance spillovers, and correlation stability: Empirical evidence of financial contagion

• DOI: 10.1016/j.csda.2009.03.018
• Publication Date: 2009-04-06T08:23:57Z
• Authors: Monica Billio; Massimiliano Caporin
• Keywords: 0502 economics and business; 05 social sciences; jel:C51; jel:F3; interdependence; volatility; equity; crisis; jel:C32; Financial market contagion, Market linkages, Variance spillovers, Dynamic correlations, Rolling correlations, Transformed correlations; Contagion models; GARCH model.; correlation matrix dinstance; jel:C22

To model the contemporaneous relationships among Asian and American stock markets, a simultaneous equation system with GARCH errors is introduced. In the estimated residuals, the correlation matrix is analyzed over rolling windows and using a correlation matrix distance, which allows a graphical analysis and the development of a statistical test of correlation movements. Furthermore, a methodology that can be used to identify turmoil periods on a data-driven basis is presented. The previous results are applied in the analysis of the contagion issue between Asian and American stock markets. The results show some evidence of contagion, and the proposed statistics identify, on a data-driven basis, turmoil periods consistent with the ones currently assumed in the literature.