Abstract
Contagion is usually referred to as the process that describes the spread of financial difficulties from one economy to others in the same region and beyond. In practice spatial contagion between two financial markets X and Y arises when significant increases in comovements of prices and quantities across markets appear, conditional on a crisis occurring in one market or group of markets. A nonparametric test and a related index to detect and measure the contagion effects are introduced. These tools are grounded on the concept of copula and on the use of related conditional Spearman's correlation coefficients. In order to distinguish between normal comovements, due to simple interdependence among markets, and excessive comovements, the proposed approach is based on the determination of a suitable threshold associated with a tail and a central set. As an empirical application, the proposed test is exploited in order to detect contagion in the Euro area and the related index is used for obtaining a contagion-based hierarchical clustering of European stock market indices. The whole procedure is expected to be useful for portfolio management in crisis periods. spread of financial difficulties from one economy to others in the same region and beyond. In practice spatial contagion between two financial markets X and Y arises when significant increases in comovements of prices and quantities across markets appear, conditional on a crisis occurring in one market or group of markets. A nonparametric test and a related index to detect and measure the contagion effects are introduced. These tools are grounded on the concept of copula and on the use of related conditional Spearman's correlation coefficients. In order to distinguish between normal comovements, due to simple interdependence among markets, and excessive comovements, the proposed approach is based on the determination of a suitable threshold associated with a tail and a central set. As an empirical application, the proposed test is exploited in order to detect contagion in the Euro area and the related index is used for obtaining a contagion-based hierarchical clustering of European stock market indices. The whole procedure is expected to be useful for portfolio management in crisis periods.