Unravelling financial market linkages during crises

Mardi H. Dungey · Vance L. Martin

195 citations0/0 files storedJournal of Applied Econometrics

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Financial Risk and Volatility Modeling Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

Abstract An empirical model of multiple asset classes across countries is formulated in a latent factor framework. A special feature of the model is that financial market linkages during periods of financial crises, including spillover and contagion effects, are formally specified. The model also captures a range of common factors including global shocks, country and market shocks, and idiosyncratic shocks. The framework is applied to modelling linkages between currency and equity markets during the East Asian financial crisis of 1997–98. The results provide strong evidence that cross‐market links are important. Spillovers have a relatively larger effect on volatility than contagion, but both are statistically significant. Copyright © 2007 John Wiley & Sons, Ltd.

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References

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