Asset Market Linkages in Crisis Periods
Posted: 22 Aug 2003
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 between stock markets are much more likely than between bond markets. However, for the assessment of financial system stability the widely disregarded cross-asset perspective is particularly important. For example, our data show that 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
Suggested Citation: Suggested Citation