Abstract
Standard methods of testing contagion may not work well if the data set is not normally distributed. To cope with this problem, Hatemi-J and Hacker (2005) proposed a new case-resampling bootstrap method to test contagion. In this paper, we extend this method to test the parameters in the Forbes-Rigobon multivariate (FRM) test. The new method has the advantage that the bivariate model is extended to a multivariate framework which jointly models and tests all combinations of contagious linkages. We apply our method to investigate contagion across equity and real estate markets of four countries: Greece, U.K., U.S. and Hong Kong, during the European sovereign debt crisis, and compare the result with that by performing the FRM test directly. Two important results are found. Firstly, both tests we use give similar p-values of the coefficients which indicate the significance of contagion. Secondly, for both tests, the contagion pattern in the equity and real estate markets are different. Our study has an implication to investors that they should regularly review their portfolio and be aware of contagion triggered by a crisis. This would help them reduce their loss and is useful in strategic property management.
Highlights
Most investors are risk-averse, i.e. they seek for opportunities to reduce the risk of their investment
The only difference is that the case resampling bootstrap method shows significance evidence of contagion in the real estate market from U.K. to Greece, but the Forbes-Rigobon multivariate (FRM) test shows that contagion in this direction is insignificant
The major pattern of contagion is between Greece and U.S, and between U.K. and Hong Kong
Summary
Most investors are risk-averse, i.e. they seek for opportunities to reduce the risk of their investment. The European sovereign debt crisis happened just recently, so there are still no publications on contagion across asset markets during the crisis This crisis involves emerging markets in Europe which previous studies seldom worked on, so we do not know much about the contagion patterns among these countries. As Hatemi-J and Roca (2010) pointed out, the above standard methods may not work well on data which do not satisfy the conditions of normality and constant variance To cope with this problem, Hatemi-J and Hacker (2005) proposed a caseresampling bootstrap method to test contagion, and applied this method to test for contagion from Thai to Indonesian equity markets during the Asian financial crisis.
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