Abstract
Contagion tests that are based on the correlation coefficient assume constant correlations and symmetric impacts of shocks. Moreover, they neglect volatility as a potential factor of contagion. We show that such tests can be misleading when correlations are time-varying and volatility is contagious per se. We propose a new test that is based on a regression model that eliminates the shortcomings of these tests and differentiates between mean contagion and volatility contagion in an asymmetric way. Empirical results for 11 Asian stock markets show that there is mean and volatility contagion in the Asian crisis.
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