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Financial Contagion: A New Perspective (and a New Test)

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  • Matteo Cominetta

    (ESM)

Abstract

Contagion has mostly been interpreted and tested as a break from a stable linear correlation of financial markets caused by an extraordinary shock. This paper argues that quantile regression can provide a tool to investigate alterations in other features of financial returns’ distribution caused by extraordinary shocks, thus providing additional understanding of the mechanism of financial shock propagation and its instability. Applying the technique to stock market returns, we find evidence that jumps in uncertainty have powerful contagious effects of a form different from an increase in markets’ correlation. These effects would not be detectable in standard contagion tests that search for increases in market correlation.

Suggested Citation

  • Matteo Cominetta, 2016. "Financial Contagion: A New Perspective (and a New Test)," Working Papers 12, European Stability Mechanism.
    • Handle: RePEc:stm:wpaper:12
    as

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    File URL: https://www.esm.europa.eu/sites/default/files/document/wp12complete.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Contagion; Correlation Analysis; Quantile Regression;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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