Abstract
This paper proposes an original three-part sequential testing procedure (STP) with which to test for contagion using a multivariate model. First, conditional on breaks in the conditional mean, the procedure identifies distinct structural breaks in the volatility of a given set of countries. A further structural break test applied to the correlation matrix identifies and then dates the potential contagion mechanisms. As a third element, the STP tests for the distinctiveness of the break dates previously found. As a result of using multi-dimensional data, the STP has high testing power and is able to locate the dates of contagion more precisely. The application to European long-term interest rates shows that immediate contagion from Greece does not take place, but the dynamic spillovers are shown to increase after controlling for breaks in the different model parameters. For other countries we find evidence of both contagion and flight-to-quality mechanisms.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.