Empirical Modelling of Contagion: A Review of Methodologies
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Citations
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Asset Market Linkages in Crisis Periods
International Stock Return Comovements
The Global Crisis and Equity Market Contagion
International Stock Return Comovements
References
Neglected common factors in exchange rate volatility
Contagion; Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria
Perspectives on the Recent Currency Crisis Literature
Multiple equilibria, contagion, and the emerging market crises
A Multifactor Model of Exchange Rates with Unanticipated Shocks: Measuring Contagion in the East Asian Currency Crisis
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Frequently Asked Questions (10)
Q2. What have the authors stated for future works in "Empirical modelling of contagion: a review of methodologies∗" ?
Finally, the extreme returns test of Bae, Karolyi and Stulz ( 2003 ) is a further reÞnement of the Eichengreen et al framework, and hence can be similarly cast in a latent factor model and expressed as a test on the parameter γ. Whilst the paper has drawn together many of the existing empirical methods to identify contagion there are many further questions to be addressed.
Q3. What are the difficulties in modelling transmission across nancial assets?
Some of the difficulties in modelling transmission across Þnancial assets include controlling for different time zone issues, data frequency and volatility structures across both country and asset types.
Q4. How does the Favero and Giavazzi test work?
In implementing the Favero and Giavazzi (2002) test, the structural model needs to be estimated using a simultaneous equation estimator to correct for simultaneity bias.
Q5. What is the effect of contagion on the conditional variance and covariance of asset?
In particular, contagion has the effect of causing a structural shift during the crisis period in the conditional covariance by γδ1, and the conditional variance by γ2.
Q6. What is the attraction of the Eichengreen et al approach?
One of the attractions of the Eichengreen et al (1995, 1996) approach is that it generates probability estimates (Pt) of the spread of Þnancial crises across countries.
Q7. What is the identifying assumption used by Mahieu and Schotman in this paper?
The identifying assumption used by Mahieu and Schotman (1994) in a similar problem is to set λiλj to a constant value, L, for all i 6= j.
Q8. What is the implication of the approach?
An implication of the approach though is that it requires switching the exogeneity status of the variables, an issue that is discussed further below.
Q9. What is the way to capture the properties of two stable equilibria?
In the case of two stable equilibria, these properties can be captured by a mixture distributionf (yi,t) = φf1 (yi,t) + (1− φ) f2 (yi,t) , (70)where 0 < φ < 1 is a parameter which weights the individual densities fi () with means corresponding to the stable equilibria, to form the overall density.
Q10. What is the determinant of the change in the covariance matrix?
This test is referred to as the determinant of the change in the covariance matrix (DCC) as it is based on comparing the covariance matrices across two samples and then taking the determinant to express the statistic as a scalar.