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Detecting and dating possibly distinct structural breaks in the covariance structure of financial assets

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  • Mugrabi, Farah Daniela

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

Abstract

This paper aims to identify and date contagion by accounting for possibly distinct structural breaks among the covariance structure of financial assets. We propose an efficient three-steps procedure that applies the Lagrange Multiplier test, in particular the SupLM statistic, among the DCC-GARCH model parameters. Monte Carlo experiments show that our procedure possess good power and accurately detects the location of the true breaking points. We explore contagion between the government bond and stock markets of advanced and emerging economies. Evidence of common shifts in the covariance structure coincides with the European Sovereign Debt Crisis, the Taper Tantrum originated in United States in mid-2013 and the Covid-19 pandemic.

Suggested Citation

  • Mugrabi, Farah Daniela, 2023. "Detecting and dating possibly distinct structural breaks in the covariance structure of financial assets," LIDAM Discussion Papers LFIN 2023001, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlf:2023001
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    References listed on IDEAS

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    More about this item

    Keywords

    Contagion; emerging markets; unknown structural breaks; Lagrange Multiplier test; DCC-GARCH model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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