Financial markets contagion - the copula based approach.
Warsaw University, Faculty of Mathematics, Computer Science and Mechanics (MIMUW), Banacha 2, Warszawa 02-097, Poland
Financial contagion is the cross-market transmission of shocks or the general cross-market spillover effects. It can take place both during "good" times and "bad" times. Then, contagion does not need to be related to crises. However, it is emphasized during crisis times.
We propose the following definition of contagion (Durante, Jaworski 2009). Let X and Y be the random variables representing returns of two financial markets. Thus, contagion is defined as an increase of the dependence in some tail regions of the joint distribution of (X,Y) with respect to some central regions. Moreover, as just copulas describe the dependence among random variables, contagion refers to the comparison among threshold copulas obtained with respect to tail regions or central regions of the unit square.
As an empirical illustration of the above methodology we consider two markets:
Presentation: Oral at 4 Ogólnopolskie Sympozjum "Fizyka w Ekonomii i Naukach Społecznych", by Piotr Jaworski
See On-line Journal of 4 Ogólnopolskie Sympozjum "Fizyka w Ekonomii i Naukach Społecznych"
Submitted: 2009-03-03 09:53 Revised: 2009-06-07 00:48