A Coexceedance Approach on Financial Contagion

Abstract

The paper sheds light on financial contagion within the Euro Area and Asia, and contagion from the Euro Area to Asia during two recent crises. Using both original constant threshold and Value-at-Risk to estimate extreme negative returns, the empirical findings indicate the existence of contagion from the Euro Area to Asia, and reveal that contagion in the Euro Area is more severe than in Asia. Applying the multinomial logit regression model, the paper also investigates how the macro-finance variables affect the coincidence of extreme negative returns (coexceedances). The results show that the probability of the occurrence of coexceedances is strongly explained by the idiosyncratic risks: the changes in exchange rates, the regional stock market volatility, and global shocks: the changes in the U.S. long-term interest rates, the TED spread. However, the paper finds the opposite reactions of coexceedances in the Euro Area and Asia to the changes in exchange rates. The global volatility index is only significant to explain the likelihood of coexceedances in the Euro Area, not in Asia.

Keywords: financial contagion, coexceedance, multinomial logit model

JEL Classification: G15, C53