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Abstract

Identifying contagion effects during periods of financial crisis is known to be complicatedby the changing volatility of asset returns during periods of stress. Tountangle this we propose a GARCH (generalized autoregressive conditional heteroskedasticity)common features approach, where systemic risk emerges from acommon factor source (or indeed multiple factor sources) with contagion evidentthrough possible changes in the factor loadings relating to the common factor(s).Within a portfolio mimicking factor framework this can be identified using momentconditions. We use this framework to identify contagion in three illustrations involvingboth single and multiple factor specifications: to the Asian currency marketsin 1997–1998, to US sectoral equity indices in 2007–2009 and to the CDS (creditdefault swap) market during the European sovereign debt crisis of 2010–2013. Theresults reveal the extent to which contagion effects may be masked by not accountingfor the sources of changed volatility apparent in simple measures such as correlation.

Item Type:	Article
Authors/Creators:	Dungey, M and Renault, E
Keywords:	contagion, conditional volatility
Journal or Publication Title:	Journal of Applied Econometrics
Publisher:	John Wiley & Sons Ltd
ISSN:	0883-7252
DOI / ID Number:	https://doi.org/10.1002/jae.2593
Copyright Information:	Copyright 2017 John Wiley & Sons, Ltd.
Related URLs:	Google Scholar: Dungey, M UTAS Profile: Dungey, M
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