Financial Contagion: A New Perspective (and a New Test)

32 Pages Posted: 13 Mar 2018

Date Written: April 1, 2016


Contagion has mostly been interpreted and tested as a break from a stable linear correlation of financial markets caused by an extraordinary shock. This paper argues that quantile regression can provide a tool to investigate alterations in other features of financial returns’ distribution caused by extraordinary shocks, thus providing additional understanding of the mechanism of financial shock propagation and its instability. Applying the technique to stock market returns, we find evidence that jumps in uncertainty have powerful contagious effects of a form different from an increase in markets’ correlation. These effects would not be detectable in standard contagion tests that search for increases in market correlation.

Keywords: Contagion, Correlation Analysis, Quantile Regression

JEL Classification: F30, C10, G10, G15

Suggested Citation

Cominetta, Matteo, Financial Contagion: A New Perspective (and a New Test) (April 1, 2016). European Stability Mechanism Working Paper No. 12; ISBN 978-92-95085-19-0 . Available at SSRN: or

Matteo Cominetta (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale

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