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Identifying contagion

Citation

Dungey, M and Renault, E, Identifying contagion, Journal of Applied Econometrics pp. 1-24. ISSN 0883-7252 (2017) [Refereed Article]


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DOI: doi:10.1002/jae.2593

Abstract

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 19971998, to US sectoral equity indices in 20072009 and to the CDS (credit default swap) market during the European sovereign debt crisis of 20102013. 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 Details

Item Type:Refereed Article
Keywords:contagion, conditional volatility
Research Division:Economics
Research Group:Applied Economics
Research Field:Financial Economics
Objective Division:Economic Framework
Objective Group:Macroeconomics
Objective Field:Savings and Investments
Author:Dungey, M (Professor Mardi Dungey)
ID Code:120279
Year Published:2017
Web of Science® Times Cited:1
Deposited By:Economics and Finance
Deposited On:2017-08-18
Last Modified:2017-08-28
Downloads:0

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