International financial contagion of the US sub-prime crisis: evidence through the adjusted correlation test and non-linear Error Correction Models (ECM)

Abstract

In this essay, we test the presence of the contagion phenomenon during the US sub-prime crisis. We adopt the test of adjusted correlation coefficients between markets and propose a new procedure which involves testing the non-linearity of the propagation mechanisms shocks, estimated with a model of long-term interdependence. We apply this methodology to the financial markets which measure the risk perception. Our results conclude contagion, some interdependence between the financial markets of USA, France, Germany, Japan and UK during the current crisis.