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Detecting financial contagion using a new nonparametric measure of asymmetric comovements

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  • Zhang, Feipeng
  • Xu, Yixiong
  • Yuan, Di

Abstract

This article proposes a new nonparametric test to detect financial contagion by using a Kendall’s tau-based asymmetric measure of comovements between two time series. Simulation studies demonstrate the reasonable size performance and good power in finite sample of our test. An empirical application of our test on exchange rate markets before and after the COVID-19 pandemic exhibits evidence of contagion between the pairs of AUD-CNY, AUD-JPY, CNY-JPY and EUR-JPY. Comparing the comovement changes at different pandemic prevention policy stages, the JPY currency is contagious with all other exchange rates and is the principal risk-bearer on exchange markets, whereas the EUR is more independent, with no evidence of contagion between the EUR and other currencies except JPY. These findings provide valuable reference and implications for policymakers and financial investors.

Suggested Citation

  • Zhang, Feipeng & Xu, Yixiong & Yuan, Di, 2024. "Detecting financial contagion using a new nonparametric measure of asymmetric comovements," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 284-296.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:284-296
    DOI: 10.1016/j.iref.2023.07.067
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    More about this item

    Keywords

    Asymmetric comovements; Contagion; Exchange rate; Nonparametric test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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