Testing for Contagion: A Conditional Correlation Analysis

Posted: 31 Aug 2005

See all articles by Nicola Spagnolo

Nicola Spagnolo

Brunel University London - Economics and Finance

Andrea Cipollini

University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Abstract

In this paper, we test for contagion within the East Asian region, contagion being defined as a significant increase in the degree of comovement between stock returns in different countries. For this purpose, we use a parameter stability test, and, following [Rigobon, R., 2003a. On the measurement of the international propagation of shocks: is the transmission stable?, Journal of International Economics], we control for three types of bias, resulting from heteroscedasticity, endogeneity and omitted variable, respectively. The null of interdependence against the alternative of contagion is then tested as an overidentifying restriction. Unlike other studies, our approach is based on full-sample estimation, and hence avoids the power problems arising from the typical situation of a large "noncrisis" and a small "crisis" sample. We also select endogenously the breakpoints corresponding to the beginning of the contagion period, and finally we impose more plausible restrictions to identify the system. Our findings suggest the existence of contagion within the East Asian region, consistent with crisis-contingent theories of asset market linkages.

Keywords: Contagion, Financial crises, Conditional correlation

JEL Classification: F30, G15

Suggested Citation

Spagnolo, Nicola and Cipollini, Andrea and Caporale, Guglielmo Maria, Testing for Contagion: A Conditional Correlation Analysis. Journal of Empirical Finance, Vol. 12, No. 3, pp. 476-489. Available at SSRN: https://ssrn.com/abstract=789224

Nicola Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

Andrea Cipollini

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
+44 1895 266713 (Phone)
+44 1895 269770 (Fax)

HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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