Testing for Stock Market Contagion: A Quantile Regression Approach

Tinbergen Institute Discussion Paper 15-040/III

57 Pages Posted: 27 Mar 2015

See all articles by Sungyong Park

Sungyong Park

Chung-Ang University

Wendun Wang

Erasmus University Rotterdam (EUR) - Department of Econometrics

Naijing Huang

Boston College Department of Economics

Date Written: March 25, 2015

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

JEL Classification: C21, C58, D53

Suggested Citation

Park, Sungyong and Wang, Wendun and Huang, Naijing, Testing for Stock Market Contagion: A Quantile Regression Approach (March 25, 2015). Tinbergen Institute Discussion Paper 15-040/III. Available at SSRN: https://ssrn.com/abstract=2585468 or http://dx.doi.org/10.2139/ssrn.2585468

Sungyong Park (Contact Author)

Chung-Ang University ( email )

221 Heuksuk-dong
Dongjak-gu
Seoul, 156-756
Korea, Republic of (South Korea)

Wendun Wang

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Naijing Huang

Boston College Department of Economics ( email )

Beacon Street
Chestnut Hill, MA 02467
United States

HOME PAGE: http://https://sites.google.com/site/1985naijinghuang/

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