Faculty of Economics and Business Administration Publications Database

Contagion and interdependence in stock markets: Have they been misdiagnosed?

Billio, Monica
Volume: 55
Number: 5-6
Pages: 405 - 426
Month: September
ISSN-Print: 0148-6195
Link External Source: Online Version
Year: 2003
Keywords: Contagion; Stock market crises; International financial markets

We discuss different methods proposed in the literature to analyse the propagation mechanism of a crisis and to verify the presence of contagion. We consider the propagation mechanisms of the Hong Kong index on the Eurostoxx, Nikkei and Dow Jones indexes during the Asian financial crisis. We show that the methodologies proposed by Forbes and Rigobon [J. Finance 57 (2002) 2223] and by Corsetti et al. [Some contagion, some interdependence more pitfalls in tests of financial contagion, CEPR Discussion Paper No. 3310, London, 2002] are highly affected by the windows used and by the presence of omitted variables: we propose some analyses to strengthen the robustness of these tests. Concerning the DCC test, we show that it is unable to cope with some kinds of heteroskedasticity.