Dungey, M and Renault, E, Identifying contagion, Journal of Applied Econometrics, 33, (2) pp. 227-250. ISSN 0883-7252 (2017) [Refereed Article]
Copyright 2017 John Wiley & Sons, Ltd.
Identifying contagion effects during periods of financial crisis is known to be complicated by the changing volatility of asset returns during periods of stress. To untangle this we propose a GARCH (generalized autoregressive conditional heteroskedasticity) common features approach, where systemic risk emerges from a common factor source (or indeed multiple factor sources) with contagion evident through possible changes in the factor loadings relating to the common factor(s). Within a portfolio mimicking factor framework this can be identified using moment conditions. We use this framework to identify contagion in three illustrations involving both single and multiple factor specifications: to the Asian currency markets in 1997–1998, to US sectoral equity indices in 2007–2009 and to the CDS (credit default swap) market during the European sovereign debt crisis of 2010–2013. The results reveal the extent to which contagion effects may be masked by not accounting for the sources of changed volatility apparent in simple measures such as correlation.
|Item Type:||Refereed Article|
|Keywords:||contagion, conditional volatility|
|Research Group:||Applied economics|
|Research Field:||Financial economics|
|Objective Division:||Economic Framework|
|Objective Field:||Savings and investments|
|UTAS Author:||Dungey, M (Professor Mardi Dungey)|
|Web of Science® Times Cited:||18|
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