Testing for Contagion: A new time-varying Copula Approach

B. Candelon, H. Manner

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This paper proposes a new approach based on time-varying copulas to test for the presence of increases in stock market interdependence (also known as shift contagion) after a financial crisis. We discuss the importance of considering simultaneously separate breaks in volatility and dependence. Without such consideration, the contagion test turns out to be biased. A sequential algorithm is proposed to tackle this problem. Applied to the recent 1997 Asian crisis, the analysis confirms that breaks in variances always precede those in the dependence parameter. Moreover, a significant 'J-shape' evolution of the dependence parameter is detected, supporting the idea of shift contagion.

Original languageEnglish
Pages (from-to)364-384
Number of pages21
JournalPacific Economic Review
Volume15
Issue number3
DOIs
Publication statusPublished - Aug 2010

Keywords

  • CHANGE-POINT
  • CONTAGION
  • INTERDEPENDENCE
  • DEPENDENCE
  • MODELS

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