Endogenous crisis dating and contagion using smooth transition structural GARCH

Abstract

Detecting contagion during financial crises requires the demarcation of crisis periods. We develop a method for endogenously dating both the start and finish of crises, along with measuring contagion effects. Identification is achieved by coupling smooth transition functions with structural GARCH. In an application to US equity, bond and REIT returns for 2001–2010, we identify four phases; a pre-crisis period to July 2007, two phases of crisis up to and following October 2008, and a post-crisis phase from mid-May 2009. We detect significant contagion during the crisis and find evidence that the post-crisis period has not returned to pre-crisis relations.