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

32 Pages Posted: 13 Mar 2018

Date Written: April 1, 2016

Abstract

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: https://ssrn.com/abstract=3139029 or http://dx.doi.org/10.2139/ssrn.3139029

Matteo Cominetta (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Register to save articles to
your library

Register

Paper statistics

Downloads
31
Abstract Views
195
PlumX Metrics