Testing For Contagion: A Conditional Correlation Analysis

By Guiglielmo Maria Caporale, rea cipollini, Nicola Spagnolo. 2005

250 citations recorded by the source corpus.

In this paper we test for contagion within the East Asian region, contagion being defined as a significant increase in the degree of co- movement between stock returns in different countries. For this purpose we use a parameter stability test and, following Rigobon (2004), 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 over-identifying 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 “non-crisis” 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 in order to identify the system. Our findings suggest the existence of contagion within the East Asian region, consistently with crisis-contingent theories of asset market linkages.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/47f39ea762b66502d3697eea1dc79f4f7bde1ceb

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Citations in the corpus

Once Again, is Openness Good for Growth? (2004, unknown): “Applications where the heteroskedasticity is described by regimes shifts are Rigobon (2002b 2003b), Rigobon and Sack (2003b), Caporale et. al. (2002b) .”
Volatility Spillovers, Comovements and Contagion in Securitized Real Estate Markets (2011, unknown): “The first papers that empirically implement such a definition base their measure of crossmarket linkages on correlations via time series models; for instance, Caporale et al. (2005) and Chiang et al. (2007).”
Volatility Spillovers and Contagion from Mature to Emerging Stock Markets (2008, unknown): “ Caporale, Cipollini, and Spagnolo (2005) select the breakpoints marking the beginning of the crises in each of the Asian crisis countries endogenously.”
Empirical Modeling of Contagion (2004, unknown): “Caporale, Cipollini, and Spagnolo (2002) conduct a test of contagion based on a slope dummy, but do not identify the connection of the test with the Forbes and Rigobon (2002) correlation approach.”
Asset Prices and Exchange Rates (2007, unknown): “For applications see Caporale, Cipollini, and Demetriades (2002), Caporale, Cipollini, and Spagnolo (2002), Rigobon and Sack (2003). equations.”
Eurozone sovereign contagion: Evidence from the CDS market (2005–2010) (2012, methodology): “Since we are interested in the increase in the relationship itself we control for volatility by deriving the adjusted correlation coefficient from equation (5).”
No contagion, only globalization and flight to quality (2012, background): “Candelon et al. (2005) examined the Hong Kong crisis, which they situate in the period from October 17 to 31, 1997, while Caporale et al. (2005) deal with the entire Asian crisis.”
Dynamical Hierarchical Tree in Currency Markets (2007, unknown): “[16] use conditional correlation analysis and find evidence of contagion for most pair of countries during the Asian crises; moreover they find strong evidence of interdependence among Asian countries during tranquil times.”
Structural breaks in volatility spillovers between international financial markets: Contagion or mere interdependence? (2014, methodology): “This definition goes back to Forbes and Rigobon (2002) and has also been employed, for example, by Caporale et al. (2005), Pesaran and Pick (2007), Baele and Inghelbrecht (2010) and Billio and Caporin (2010).”