Joint Tests of Contagion with Applications to Financial Crises

Renee Fry-McKibbin, Vance L Martin, Cody Yu-Ling Hsiao

    Research output: Contribution to journalArticle

    Abstract

    Joint tests of contagion are derived which are designed to have power where contagion operates simultaneously through coskewness, cokurtosis and covolatility. Finite sample properties of the new tests are evaluated and compared with existing tests of contagion that focus on a single channel. Applying the tests to daily euro zone equity returns from 2005 to 2014 shows that contagion operated mainly through higher order moment channels during the GFC and the European debt crisis, which were not necessarily detected by traditional tests based on correlations. The empirical results have important implications for pricing risk and constructing well diversified portfolios.
    Original languageEnglish
    Pages (from-to)473-490
    JournalQuantitative Finance
    Volume19
    Issue number3
    DOIs
    Publication statusPublished - 2018

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