Financial Contagion: A New Perspective (and a New Test)

Matteo Cominetta
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Matteo Cominetta: ESM

Working Papers from European Stability Mechanism

Abstract: Contagion has mostly been interpreted and tested as a break from a stable linear correlation of financial markets caused by an extraordinary shock. This paper argues that quantile regression can provide a tool to investigate alterations in other features of financial returns’ distribution caused by extraordinary shocks, thus providing additional understanding of the mechanism of financial shock propagation and its instability. Applying the technique to stock market returns, we find evidence that jumps in uncertainty have powerful contagious effects of a form different from an increase in markets’ correlation. These effects would not be detectable in standard contagion tests that search for increases in market correlation.

Keywords: Contagion; Correlation Analysis; Quantile Regression (search for similar items in EconPapers)
JEL-codes: C10 F30 G10 G15 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2016-04-01
New Economics Papers: this item is included in nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:12

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