Extreme Contagion in Equity Markets

23 Pages Posted: 15 Apr 2005

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department

Donald J. Mathieson

International Monetary Fund (IMF)

James Y. Yao

International Monetary Fund (IMF)

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Abstract

Contagion can be defined as the probability of observing large return realizations simultaneously across different financial markets (co-exceedances) rather than as increases in correlations. We introduce global extreme contagion measures constructed from bivariate extremal dependence measures. The measures are used to quantify both negative and positive equity returns contagion at the inter- and intraregional level for a number of mature and emerging equity markets during the past decade. Our results suggest that (a) contagion patterns differ significantly within regions and across regions, with Latin America showing a secular increase in contagion not matched by other regions or countries; (b) contagion is higher for negative returns than for positive returns; (c) only the 1998 Russian and Brazilian crises led to a global increase in contagion; and (d) extremal dependence measures of contagion and simple correlation measures are not highly correlated, with the exception of Latin America, suggesting that the use of correlations as a proxy for contagion may be misleading.

Keywords: Contagion, equity markets, extreme value theory

JEL Classification: F30, G10, G15, C10

Suggested Citation

Chan-Lau, Jorge Antonio and Mathieson, Donald J. and Yao, James Y., Extreme Contagion in Equity Markets. Available at SSRN: https://ssrn.com/abstract=689241

Jorge Antonio Chan-Lau (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Donald J. Mathieson

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

James Y. Yao

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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