Joint tests of contagion with applications
R Fry-McKibbin, CYL Hsiao, VL Martin
Quantitative Finance | Taylor & Francis (Routledge) | Published : 2019
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.
Related Projects (1)
Awarded by Australian Research Council ARC
Awarded by Macau University of Science and Technology Foundation for Faculty Research Grant
The authors gratefully acknowledge Australian Research Council ARC Discovery Project DP160102350 and DP120103443 funding and Macau University of Science and Technology Foundation for Faculty Research Grant FRG-17-019-MSB.