A contagion test with unspecified heteroscedastic errors

Ernest Aboagye, Stanley Iat-Meng Ko, Chia Chun Lo, Cody Yu-Ling Hsiao and Liang Peng

Journal of Economic Dynamics and Control, 2024, vol. 159, issue C

Abstract: The tests of contagion in Fry-McKibbin et al. (2010) filter returns by a vector autoregressive model, assume residuals are independent, fit a parametric distribution family to residuals, and test for the change of contagion measures, which ignore the effect of filtering the time series model and the stylized fact of heteroscedasticity in daily returns. This paper studies a contagion test based on correlation by allowing heteroscedastic errors with a deterministic jump from the pre-crisis to the crisis periods. Because the developed test does not infer heteroscedasticity, it is robust against heteroscedasticity but its asymptotic variance under the null hypothesis of no contagion becomes complicated, which relies on a block method for estimating the asymptotic variance. A simulation study confirms the good finite sample performance of the new contagion test. Finally, we apply the test to three datasets to test for contagion.

Keywords: Contagion test; Heteroscedasticity; Variance estimation (search for similar items in EconPapers)
JEL-codes: C51 G12 G15 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:159:y:2024:i:c:s0165188923002105

DOI: 10.1016/j.jedc.2023.104804

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