Testing for financial contagion based on a nonparametric measure of the cross‐market correlation |
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Authors: | Fuchun Li Hui Zhu |
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Affiliation: | 1. Bank of Canada, Financial Stability Department, Ottawa, ON K1A 0G9, Canada;2. University of Ontario Institute of Technology, Faculty of Business and Information Technology, Oshawa, ON L1H 7K4, Canada |
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Abstract: | When contagion is defined as a significant increase in market comovement after a shock to one country, we propose a test for financial contagion based on a nonparametric measure of the cross-market correlation. Monte Carlo simulation studies show that our test has reasonable size and good power to detect financial contagion, and that Forbes and Rigobon's test (2002) is relatively conservative, indicating that their test tends not to find evidence of contagion when it does exist. Applying our test to investigate contagion from the 1997 East Asian crisis and the 2007 Subprime crisis, we find that there existed international financial contagion from the two financial crises. |
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Keywords: | Financial contagion Financial crisis Nonparametric measure of the cross‐market correlation Monte Carlo simulation |
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