Asset Market Linkages in Crisis Periods

Abstract

We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this non-parametric measure is not predisposed towards the normal distribution and can account for non-linear relationships. Our estimates for the G-5 countries suggest that simultaneous crashes in stock markets are about two times more likely than in bond markets. Moreover, stock-bond contagion is about as frequent as flight to quality from stocks into bonds. Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration.

Keywords: Financial crises, systemic risk, contagion, market crashes, flight to quality, bivariate extreme value analysis, extreme co-movements

JEL Classification: G1, F3, C49