Market linkages, variance spillovers, and correlation stability: Empirical evidence of financial contagion

To model the contemporaneous relationships among Asian and American stock markets, a simultaneous equation system with GARCH errors is introduced. In the estimated residuals, the correlation matrix is analyzed over rolling windows and using a correlation matrix distance, which allows a graphical analysis and the development of a statistical test of correlation movements. Furthermore, a methodology that can be used to identify turmoil periods on a data-driven basis is presented. The previous results are applied in the analysis of the contagion issue between Asian and American stock markets. The results show some evidence of contagion, and the proposed statistics identify, on a data-driven basis, turmoil periods consistent with the ones currently assumed in the literature. (C) 2009 Elsevier B.V. All rights reserved.