Journal
QUANTITATIVE FINANCE
Volume 19, Issue 3, Pages 473-490Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
DOI: 10.1080/14697688.2018.1475747
Keywords
Coskewness; Cokurtosis; Covolatility; Lagrange multiplier tests; European financial crisis; Equity markets
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Funding
- Australian Research Council ARC [DP160102350, DP120103443]
- Macau University of Science and Technology Foundation for Faculty Research Grant [FRG-17-019-MSB]
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Joint tests of contagion are derived which are designed to have power where contagion operates simultaneously through coskewness, cokurtosis and covolatility. Finite sample properties of the new tests are evaluated and compared with existing tests of contagion that focus on a single channel. Applying the tests to daily euro zone equity returns from 2005 to 2014 shows that contagion operated mainly through higher order moment channels during the GFC and the European debt crisis, which were not necessarily detected by traditional tests based on correlations. The empirical results have important implications for pricing risk and constructing well diversified portfolios.
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