Measuring Financial Contagion with Extreme Coexceedances

Apostolos Thomadakis

Research output: Working paperDiscussion paper

Abstract

This paper tests for contagion firstly, within the Euro Area (EA thereafter), and secondly from the US to the EA. Using coexceedances - the joint occurrences of extreme negative and positive returns in different countries in a given day - I define contagion within regions as the fraction of the coexceedances that cannot be explained by fundamentals (covariates). On the other hand, contagion across regions can be defined as the fraction of the coexceedance
events in the EA that is left unexplained by its own covariates but that is explained by the exceedances from the US. Having applied a multinomial logistic regression model to daily returns on 14 European stock markets for the period 2004-2012, I can provide the following summary of the results. Firstly, I found evidence of contagion within the EA. Especially, the EA 10 year government bond yield and the EUR/USD exchange rate fail to adequately explain the probability of coexceedances in Europe. Therefore, these variables are important determinants of regional crashes. In addition, I have observed that negative movements in stock prices follow continuation patterns - coexceedances cluster across time. Secondly, there is no statistically
significant evidence of contagion from the US to the EA, in the sense that US exceedances fail to explain high probabilities of coexceedances in the EA. This result holds under a large battery of robustness checks. I would rather interpret this as a normal interdependence between the two markets.
Original languageEnglish
Place of PublicationGuildford
PublisherUniversity of Surrey
Publication statusPublished - 2012

Publication series

NameUniversity of Surrey Discussion Papers in Economics
VolumeDP 11/12
ISSN (Print)1749-5075

Fingerprint

Financial contagion
Contagion
Covariates
Logistic regression model
Crash
Government bonds
Exchange rates
European stock markets
Interdependence
Stock prices
Multinomial logistic regression
Bond yields
Robustness
Euro area

Cite this

Thomadakis, A. (2012). Measuring Financial Contagion with Extreme Coexceedances. (University of Surrey Discussion Papers in Economics; Vol. DP 11/12). Guildford: University of Surrey.

Measuring Financial Contagion with Extreme Coexceedances. / Thomadakis, Apostolos.

Guildford : University of Surrey, 2012. (University of Surrey Discussion Papers in Economics; Vol. DP 11/12).

Research output: Working paperDiscussion paper

Thomadakis, A 2012 'Measuring Financial Contagion with Extreme Coexceedances' University of Surrey Discussion Papers in Economics, vol. DP 11/12, University of Surrey, Guildford.
Thomadakis A. Measuring Financial Contagion with Extreme Coexceedances. Guildford: University of Surrey. 2012. (University of Surrey Discussion Papers in Economics).
Thomadakis, Apostolos. / Measuring Financial Contagion with Extreme Coexceedances. Guildford : University of Surrey, 2012. (University of Surrey Discussion Papers in Economics).
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