IDEAS home Printed from https://ideas.repec.org/a/taf/oaefxx/v5y2017i1p1411453.html
   My bibliography  Save this article

Speculative bubbles and contagion: Analysis of volatility’s clusters during the DotCom bubble based on the dynamic conditional correlation model

Author

Listed:
  • Maximilian-Benedikt Herwarth Kohn
  • Pedro L. Valls Pereira

Abstract

Reviewing the definition and measurement of speculative bubbles in context of contagion, this paper analyses the DotCom bubble in American and European equity markets using the dynamic conditional correlation (DCC) model proposed as on one hand as an econometrics explanation and on the other hand the behavioral finance as an psychological explanation. Contagion is defined in this context as the statistical break in the computed DCCs as measured by the shifts in their means and medians. Even it is astonishing, that the contagion is lower during price bubbles, the main finding indicates the presence of contagion in the different indices among those two continents and prove the presence of structural changes during financial crisis.

Suggested Citation

  • Maximilian-Benedikt Herwarth Kohn & Pedro L. Valls Pereira, 2017. "Speculative bubbles and contagion: Analysis of volatility’s clusters during the DotCom bubble based on the dynamic conditional correlation model," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1411453-141, January.
    • Handle: RePEc:taf:oaefxx:v:5:y:2017:i:1:p:1411453
    DOI: 10.1080/23322039.2017.1411453
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/23322039.2017.1411453
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/23322039.2017.1411453?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Historical Episodes Of Exuberance And Collapse In The S&P 500," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(4), pages 1043-1078, November.
    2. Salim M. Darbar & Partha Deb, 1997. "Co-Movements In International Equity Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 305-322, September.
    3. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, February.
    4. Isabel Maria Pereira Viegas Vieira, 2008. "Contagion effects of the US Subprime Crisis on Developed Countries," CEFAGE-UE Working Papers 2008_08, University of Evora, CEFAGE-UE (Portugal).
    5. Karolyi, G Andrew & Stulz, Rene M, 1996. "Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-986, July.
    6. George Horia Ionescu & DragoÅŸ Mihai Ungureanu & Ruxandra Dana Vilag & Florian Bogdan Stoian, 2009. "Financial Contagion And Investors Behavior," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 1-57.
    7. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    8. Bruno P. Arruda & Pedro L. Valls Pereira, 2013. "Analysis of the volatility's dependency structure during the subprime crisis," Applied Economics, Taylor & Francis Journals, vol. 45(36), pages 5031-5045, December.
    9. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 51-74, Fall.
    10. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    11. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
    12. De Bondt, Werner F. M., 1998. "A portrait of the individual investor," European Economic Review, Elsevier, vol. 42(3-5), pages 831-844, May.
    13. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    14. Gian Piero Aielli, 2013. "Dynamic Conditional Correlation: On Properties and Estimation," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(3), pages 282-299, July.
    15. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    16. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    17. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    18. Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
    19. Parhizgari, A. M. & Dandapani, K. & Bhattacharya, A. K., 1994. "Global market place and causality," Global Finance Journal, Elsevier, vol. 5(1), pages 121-140.
    20. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    21. Anderson, Keith & Brooks, Chris & Katsaris, Apostolos, 2010. "Speculative bubbles in the S&P 500: Was the tech bubble confined to the tech sector?," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 345-361, June.
    22. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    23. Tse, Y K & Tsui, Albert K C, 2002. "A Multivariate Generalized Autoregressive Conditional Heteroscedasticity Model with Time-Varying Correlations," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 351-362, July.
    24. Olivier J. Blanchard & Mark W. Watson, 1982. "Bubbles, Rational Expectations and Financial Markets," NBER Working Papers 0945, National Bureau of Economic Research, Inc.
    25. Eli Ofek & Matthew Richardson, 2001. "DotCom Mania: The Rise and Fall of Internet Stock Prices," NBER Working Papers 8630, National Bureau of Economic Research, Inc.
    26. Emerson Fernandes Marcal & Pedro Valls Pereira & Diogenes Manoel Leiva Martin & Wilson Toshiro Nakamura, 2011. "Evaluation of contagion or interdependence in the financial crises of Asia and Latin America, considering the macroeconomic fundamentals," Applied Economics, Taylor & Francis Journals, vol. 43(19), pages 2365-2379.
    27. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
    28. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    29. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
    30. Ms. Anna Scherbina, 2013. "Asset Price Bubbles: A Selective Survey," IMF Working Papers 2013/045, International Monetary Fund.
    31. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June.
    32. Pedro Nielsen Rotta & Pedro L. Valls Pereira, 2016. "Analysis of contagion from the dynamic conditional correlation model with Markov Regime switching," Applied Economics, Taylor & Francis Journals, vol. 48(25), pages 2367-2382, May.
    33. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
    34. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    35. A.S.M. Sohel Azad, 2009. "Efficiency, Cointegration and Contagion in Equity Markets: Evidence from China, Japan and South Korea," Asian Economic Journal, East Asian Economic Association, vol. 23(1), pages 93-118, March.
    36. Kate Phylaktis & Lichuan Xia, 2009. "Equity Market Comovement and Contagion: A Sectoral Perspective," Financial Management, Financial Management Association International, vol. 38(2), pages 381-409, June.
    37. Anna Scherbina & Bernd Schlusche, 2012. "Asset Bubbles: an Application to Residential Real Estate," European Financial Management, European Financial Management Association, vol. 18(3), pages 464-491, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jean-Louis Bago & Koffi Akakpo & Imad Rherrad & Ernest Ouédraogo, 2021. "Volatility Spillover and International Contagion of Housing Bubbles," JRFM, MDPI, vol. 14(7), pages 1-14, June.
    2. Waithaka, Douglas Mwangi & Kendzia, Michael Jan, 2024. "Impact of Stock Market Manias and Panics on the U.S. Labor Market," IZA Discussion Papers 17276, Institute of Labor Economics (IZA).
    3. Ana Escribano & Cristina Íñiguez, 2021. "The contagion phenomena of the Brexit process on main stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4462-4481, July.
    4. Genoni, Giulia & Quatto, Piero & Vacca, Gianmarco, 2023. "Dating financial bubbles via online multiple testing procedures," Finance Research Letters, Elsevier, vol. 58(PA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emerson Fernandes Marcal & Pedro Valls Pereira & Diogenes Manoel Leiva Martin & Wilson Toshiro Nakamura, 2011. "Evaluation of contagion or interdependence in the financial crises of Asia and Latin America, considering the macroeconomic fundamentals," Applied Economics, Taylor & Francis Journals, vol. 43(19), pages 2365-2379.
    2. Maria Kasch & Massimiliano Caporin, 2013. "Volatility Threshold Dynamic Conditional Correlations: An International Analysis," Journal of Financial Econometrics, Oxford University Press, vol. 11(4), pages 706-742, September.
    3. Dahiru A. Balaa & Taro Takimotob, 2017. "Stock markets volatility spillovers during financial crises: A DCC-MGARCH with skewed-t density approach," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(1), pages 25-48, March.
    4. Rotta, Pedro Nielsen & Pereira, Pedro L. Valls, 2013. "Analysis of contagion from the constant conditional correlation model with Markov regime switching," Textos para discussão 340, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    5. Adams, Zeno & Füss, Roland & Glück, Thorsten, 2017. "Are correlations constant? Empirical and theoretical results on popular correlation models in finance," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 9-24.
    6. Zouheir Mighri & Faysal Mansouri, 2013. "Dynamic Conditional Correlation Analysis of Stock Market Contagion: Evidence from the 2007-2010 Financial Crises," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 637-661.
    7. Otranto, Edoardo, 2010. "Identifying financial time series with similar dynamic conditional correlation," Computational Statistics & Data Analysis, Elsevier, vol. 54(1), pages 1-15, January.
    8. Marçal, Emerson Fernandes & Pereira, Pedro L. Valls, 2008. "Testing the Hypothesis of Contagion Using Multivariate Volatility Models," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 28(2), November.
    9. Kim, Bong-Han & Kim, Hyeongwoo & Lee, Bong-Soo, 2015. "Spillover effects of the U.S. financial crisis on financial markets in emerging Asian countries," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 192-210.
    10. Bauwens, Luc & Otranto, Edoardo, 2020. "Nonlinearities and regimes in conditional correlations with different dynamics," Journal of Econometrics, Elsevier, vol. 217(2), pages 496-522.
    11. Zouheir Mighri & Faysal Mansouri, 2014. "Modeling international stock market contagion using multivariate fractionally integrated APARCH approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-25, December.
    12. Demmler, Michael & Fernández, Amilcar Orlian, 2024. "Explosive behavior in historic NASDAQ market prices," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    13. Karol Szafranek, 2015. "Financialisation of the commodity markets. Conclusions from the VARX DCC GARCH," NBP Working Papers 213, Narodowy Bank Polski.
    14. Yilmaz, Mustafa K. & Sensoy, Ahmet & Ozturk, Kevser & Hacihasanoglu, Erk, 2015. "Cross-sectoral interactions in Islamic equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 32(C), pages 1-20.
    15. Silvo Dajcman, 2012. "The Dynamics of Return Comovement and Spillovers Between the Czech and European Stock Markets in the Period 1997–2010," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(4), pages 368-390, August.
    16. Berens, Tobias & Weiß, Gregor N.F. & Wied, Dominik, 2015. "Testing for structural breaks in correlations: Does it improve Value-at-Risk forecasting?," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 135-152.
    17. Rahim, Adam Mohamed & Masih, Mansur, 2016. "Portfolio diversification benefits of Islamic investors with their major trading partners: Evidence from Malaysia based on MGARCH-DCC and wavelet approaches," Economic Modelling, Elsevier, vol. 54(C), pages 425-438.
    18. Harris, Richard D.F. & Mazibas, Murat, 2010. "Dynamic hedge fund portfolio construction," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 351-357, December.
    19. Annastiina Silvennoinen & Timo Teräsvirta, 2009. "Modeling Multivariate Autoregressive Conditional Heteroskedasticity with the Double Smooth Transition Conditional Correlation GARCH Model," Journal of Financial Econometrics, Oxford University Press, vol. 7(4), pages 373-411, Fall.
    20. Su, Chi-Wei & Li, Zheng-Zheng & Chang, Hsu-Ling & Lobonţ, Oana-Ramona, 2017. "When Will Occur the Crude Oil Bubbles?," Energy Policy, Elsevier, vol. 102(C), pages 1-6.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:oaefxx:v:5:y:2017:i:1:p:1411453. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/OAEF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.