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A contagion test with unspecified heteroscedastic errors

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  • Aboagye, Ernest
  • Ko, Stanley Iat-Meng
  • Lo, Chia Chun
  • Hsiao, Cody Yu-Ling
  • Peng, Liang

Abstract

The tests of contagion in Fry-McKibbin et al. (2010) filter returns by a vector autoregressive model, assume residuals are independent, fit a parametric distribution family to residuals, and test for the change of contagion measures, which ignore the effect of filtering the time series model and the stylized fact of heteroscedasticity in daily returns. This paper studies a contagion test based on correlation by allowing heteroscedastic errors with a deterministic jump from the pre-crisis to the crisis periods. Because the developed test does not infer heteroscedasticity, it is robust against heteroscedasticity but its asymptotic variance under the null hypothesis of no contagion becomes complicated, which relies on a block method for estimating the asymptotic variance. A simulation study confirms the good finite sample performance of the new contagion test. Finally, we apply the test to three datasets to test for contagion.

Suggested Citation

  • Aboagye, Ernest & Ko, Stanley Iat-Meng & Lo, Chia Chun & Hsiao, Cody Yu-Ling & Peng, Liang, 2024. "A contagion test with unspecified heteroscedastic errors," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
  • Handle: RePEc:eee:dyncon:v:159:y:2024:i:c:s0165188923002105
    DOI: 10.1016/j.jedc.2023.104804
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    1. Hsiao, Cody Yu-Ling & Chiu, Yi-Bin, 2024. "Financial contagion and networks among the oil and BRICS stock markets during seven episodes of crisis events," Journal of International Money and Finance, Elsevier, vol. 144(C).

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    More about this item

    Keywords

    Contagion test; Heteroscedasticity; Variance estimation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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