Testing for financial contagion: New evidence from the Greek crisis and yuan devaluation

Abstract

This paper examines contagion effects from two recent crises. First, the effects of the Greek debt crisis on surrounding European nations, and second, the effects of the yuan devaluation on key trading partners such as the US and the BRICS countries. Kendall's tau correlation coefficient was used to measure the degree of cross-market linkages between equity returns before and during the crisis periods. To test for a significant increase in these coefficients that would indicate contagion, a test statistic developed by Li (2009) was used. Empirical results suggest both crises produced contagious effects. In addition, the results suggest that the contagion effects from the Greek debt crisis were not persistent while the effects from the yuan devaluation were. We further demonstrate that superior investment returns appear to be attainable when our contagion results are used for the management of trading risks.