Framework for Analyzing Spatial Contagion between Financial Markets

8 Pages Posted: 15 Apr 2005

See all articles by Brendan Bradley

Brendan Bradley

Acadian Asset Management Inc., USA

Murad S. Taqqu

Boston University - Department of Mathematics and Statistics

Abstract

We present an alternative definition of contagion between financial markets, which is based on a measure of local correlation. We say that there is contagion from market X to market Y if there is more dependence between X and Y when X is doing badly than when X exhibits typical performance, that is, if there is more dependence at the loss tail distribution of X than at its center. The dependence is measured by the local correlation between X and Y. This yields a test for contagion, which does not require the specification of crisis and normal periods. As such, it avoids difficulties associated with testing for correlation breakdown, such as hand picking subsets of the data, and it provides a better understanding of the degree of dependence between financial markets.

Keywords: Contagion, local correlation, correlation breakdown, crisis period

JEL Classification: C12, C14

Suggested Citation

Bradley, Brendan and Taqqu, Murad S., Framework for Analyzing Spatial Contagion between Financial Markets. Available at SSRN: https://ssrn.com/abstract=690061

Brendan Bradley (Contact Author)

Acadian Asset Management Inc., USA ( email )

Murad S. Taqqu

Boston University - Department of Mathematics and Statistics ( email )

111 Cummington St.
Boston, MA 02215
United States
617-353-3022 (Phone)

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