Spatial contagion between financial markets: new evidence of asymmetric measures

Abstract

The objective of this paper is to identify the presence, direction and time at which the pure contagion effect occurred between financial markets. In so doing, the aim is to prove the existence of both spatial and temporal asymmetries of pure contagion effects. Firstly, a new empirical framework is proposed in order to define a spatial contagion index using the conditional cumulative distribution function as a parameter to estimate a conditional copula. This methodology enables us to estimate a dynamic conditional copula, providing information about how the market sent pure contagion effects and when. Secondly, in addition to detecting the direction of contagion, the real-time contagion effect is determined, enabling us to calculate the delay of contagion effects (spillover) between financial markets. The present empirical results show the existence of both spatial and temporal asymmetry for bilateral contagion effects for 16 mature and emerging stock markets during the 2001–2018 period. This proves the importance of taking temporal asymmetry into account when we want to detect the contagion effect of every crisis and to estimate the period of pure contagion relating to investors’ behaviors. Finally, these findings highlight the fact that contagion effects were more intensive during the subprime crisis than they were during the European debt crisis.

Assessing stock market contagion and complex dynamic risk spillovers during COVID-19 pandemic

“…In an earlier study, utilizing the Kalman filter method, it was found that the Chinese market was highly independent of European markets during the European debt crisis period [ 55 ]. On the contrary, it is somewhat surprising that our test detects contagion to be missing when pairing the US and France, but evidence of no contagion between the US and other mature equity markets during crises is not totally unseen, as suggested by [ 43 ]. Noteworthy, these two markets maintain a considerable degree of interdependence during both the pre-COVID-19 and in-COVID-19 periods, which is different from the aforementioned pairs associated with China, where only some weak dependency is found among them.…”

“…Among the market pairs without contagion, three are associated with China, corroborating some empirical evidence from other studies. For instance, in a recent study [ 43 ], applying similar copula-based test statistics, the equity market contagion between China and the UK and between China and Japan were bidirectional insignificant. In an earlier study, utilizing the Kalman filter method, it was found that the Chinese market was highly independent of European markets during the European debt crisis period [ 55 ].…”

“…According to the value of this statistic, we test the null hypothesis of no risk spillover effects between stock markets as follows: and Test 4 : This test is to examine whether there is a significant difference between the effect of risk spillover transmitted to or received by a market. Such asymmetry follows the definition of “spatial asymmetry”, noted by [ 43 ]. More specifically, taking the upside-risk spillover between market A and market B as an example, we consider two directions: from A to B and from B to A.…”

Contagion in the Euro area sovereign CDS market: a spatial approach

“…Evidence for pure contagion is provided by Kalbaska and Gatkowski (2012), Giordano et al. (2013), Beirne and Fratzscher (2013), Miled et al. , 2022).…”

Volatility spillovers during normal and high volatility states and their driving factors: A cross‐country and cross‐asset analysis

“…Ameur et al, 2020). Another strand of research considers spillover between commodity markets (Ameur et al, 2021a), spatial contagion (Miled et al, 2022), spot and futures markets (Ameur et al, 2021b), jumps (Jawadi et al, 2019) and hedging analysis (Madani & Ftiti, 2022). 3 Although the existing literature provides evidence of asymmetric connectedness between upper tails and lower tails (e.g.…”