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Testing for contagion in US industry portfolios -- a four-factor pricing approach

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  • George Milunovich
  • Antony Tan

Abstract

We conduct an empirical investigation into the financial contagion hypothesis in the context of 12 US industry portfolios. Using a four-factor asset pricing model we measure contagion as the excess co-movement between idiosyncratic portfolio shocks, and test for an increase in the frequency of contagion during the 2007--2009 crisis sub-sample. We find evidence of 22 instances of financial contagion during the noncrisis sample period, and 21 such occurrences during the 2007--2009 crisis period, at the 5% level. It appears that the frequency of contagion remained steady or declined during the crisis for the industries that had a relatively high frequency of contagion prior to the crisis, but increased for those industries that had relatively few such incidences. Interestingly, the financial sector exhibited the least number of contagion instances across both crisis and noncrisis periods.

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  • George Milunovich & Antony Tan, 2013. "Testing for contagion in US industry portfolios -- a four-factor pricing approach," Applied Financial Economics, Taylor & Francis Journals, vol. 23(1), pages 15-26, January.
    • Handle: RePEc:taf:apfiec:v:23:y:2013:i:1:p:15-26
    DOI: 10.1080/09603107.2012.699185
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    Cited by:

    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 US Sub-Prime Financial Crisis So Different?: An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299.
    2. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284, Edward Elgar Publishing.
    3. Shahzad, Syed Jawad Hussain & Bouri, Elie & Ahmad, Tanveer & Naeem, Muhammad Abubakr & Vo, Xuan Vinh, 2021. "The pricing of bad contagion in cryptocurrencies: A four-factor pricing model," Finance Research Letters, Elsevier, vol. 41(C).
    4. Handika, Rangga & Soepriyanto, Gatot & Havidz, Shinta Amalina Hazrati, 2019. "Are cryptocurrencies contagious to Asian financial markets?," Research in International Business and Finance, Elsevier, vol. 50(C), pages 416-429.
    5. Li, Xiyang & Chen, Xiaoyue & Li, Bin & Singh, Tarlok & Shi, Kan, 2022. "Predictability of stock market returns: New evidence from developed and developing countries," Global Finance Journal, Elsevier, vol. 54(C).

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