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A novel estimation of time-varying quantile correlation for financial contagion detection

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  • Ye, Wuyi
  • Li, Mingge
  • Wu, Yuehua

Abstract

A time-varying quantile correlation (TV-QCOR) measure is developed, and the local polynomial regression framework for its estimation and statistical inference is proposed. TV-QCOR measure can capture the dynamic interdependence between financial time series and thus detect contagion between financial markets. The expression of the TV-QCOR with copula functions is proved under the standard normal marginal distribution assumption. Simulation exercises highlight its capability to describe different dependence structures. In the empirical analyses, TV-QCORs between the United States Standard&Poor 500 index and stock market indices of eight countries and regions at different τth quantiles are estimated. A contagion detection test is proposed by contrasting the TV-QCOR during a crisis period with that during a normal period; it finds contagion effect during the Great Recession of 2007–2012 and observes quite different levels of spillover effect between the United States and other countries and regions.

Suggested Citation

  • Ye, Wuyi & Li, Mingge & Wu, Yuehua, 2022. "A novel estimation of time-varying quantile correlation for financial contagion detection," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001334
    DOI: 10.1016/j.najef.2022.101796
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    More about this item

    Keywords

    Quantile correlation; Local polynomial estimation; Financial crisis; Contagion effect;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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