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Measuring Financial Contagion with Extreme Coexceedances

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  • Apostolos Thomadakis

    (University of Surrey)

Abstract

This paper tests for contagion firstly, within the Euro Area (EA thereafter), and secondly from the US to the EA. Using 'coexceedances' - the joint occurrences of extreme negative and positive returns in different countries in a given day - I define contagion within regions as the fraction of the coexceedances that cannot be explained by fundamentals (covariates). On the other hand, contagion across regions can be defined as the fraction of the coexceedance events in the EA that is left unexplained by its own covariates but that is explained by the exceedances from the US. Having applied a multinomial logistic regression model to daily returns on 14 European stock markets for the period 2004-2012, I can provide the following summary of the results. Firstly, I found evidence of contagion within the EA. Especially, the EA 10 year government bond yield and the EUR/USD exchange rate fail to adequately explain the probability of coexceedances in Europe. Therefore, these variables are important determinants of regional crashes. In addition, I have observed that negative movements in stock prices follow continuation patterns - coexceedances cluster across time. Secondly, there is no statistically significant evidence of contagion from the US to the EA, in the sense that US exceedances fail to explain high probabilities of coexceedances in the EA. This result holds under a large battery of robustness checks. I would rather interpret this as a normal interdependence between the two markets.

Suggested Citation

  • Apostolos Thomadakis, 2012. "Measuring Financial Contagion with Extreme Coexceedances," School of Economics Discussion Papers 1112, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:1112
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    2. Chouliaras, Andreas & Grammatikos, Theoharry, 2013. "News Flow, Web Attention and Extreme Returns in the European Financial Crisis," MPRA Paper 51335, University Library of Munich, Germany.
    3. Malliaris, M.E., 2012. "Comparison Of Currency Movement Before And After October 2008," The Journal of Economic Asymmetries, Elsevier, vol. 9(2), pages 45-57.

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    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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