Testing financial contagion on heteroskedastic asset returns in time-varying conditional correlation

Kwang-Il Choe, Pilsun Choi, Kiseok Nam, Farshid Vahid-Araghi

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We suggest that there is a significant relationship between cross-market comovement and time varying volatility. The time-varying component of cross-market dependence is attributed to the intertemporal risk-return adjustment by rational, risk-averse investors who systematically revise their expectation in response to changing volatility. To reflect the time-varying component of cross-market dependence, we propose a time-varying correlation test for contagion. Our results show that out of the countries reporting contagion evidence under the constant correlation test, none of the countries exhibits contagion evidence from the 1997 Asian crisis. We conclude that a high level of cross-market correlation during a crisis reported as contagion evidence under the standard constant correlation test is mostly due to the high level of cross-market co-movement resulting from the intertemporal risk-return adjustment.
Original languageEnglish
Pages (from-to)271 - 291
Number of pages21
JournalPacific Basin Finance Journal
Volume20
Issue number2
DOIs
Publication statusPublished - 2012

Cite this

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title = "Testing financial contagion on heteroskedastic asset returns in time-varying conditional correlation",
abstract = "We suggest that there is a significant relationship between cross-market comovement and time varying volatility. The time-varying component of cross-market dependence is attributed to the intertemporal risk-return adjustment by rational, risk-averse investors who systematically revise their expectation in response to changing volatility. To reflect the time-varying component of cross-market dependence, we propose a time-varying correlation test for contagion. Our results show that out of the countries reporting contagion evidence under the constant correlation test, none of the countries exhibits contagion evidence from the 1997 Asian crisis. We conclude that a high level of cross-market correlation during a crisis reported as contagion evidence under the standard constant correlation test is mostly due to the high level of cross-market co-movement resulting from the intertemporal risk-return adjustment.",
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Testing financial contagion on heteroskedastic asset returns in time-varying conditional correlation. / Choe, Kwang-Il; Choi, Pilsun; Nam, Kiseok; Vahid-Araghi, Farshid.

In: Pacific Basin Finance Journal, Vol. 20, No. 2, 2012, p. 271 - 291.

Research output: Contribution to journalArticleResearchpeer-review

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AU - Choi, Pilsun

AU - Nam, Kiseok

AU - Vahid-Araghi, Farshid

PY - 2012

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AB - We suggest that there is a significant relationship between cross-market comovement and time varying volatility. The time-varying component of cross-market dependence is attributed to the intertemporal risk-return adjustment by rational, risk-averse investors who systematically revise their expectation in response to changing volatility. To reflect the time-varying component of cross-market dependence, we propose a time-varying correlation test for contagion. Our results show that out of the countries reporting contagion evidence under the constant correlation test, none of the countries exhibits contagion evidence from the 1997 Asian crisis. We conclude that a high level of cross-market correlation during a crisis reported as contagion evidence under the standard constant correlation test is mostly due to the high level of cross-market co-movement resulting from the intertemporal risk-return adjustment.

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