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An Analysis of the Dependence Among Financial Markets by Spatial Contagion

Authors


Author to whom all correspondence should be addressed: e-mail: fabrizio.durante@unibz.it.

Abstract

Spatial contagion between two financial markets X and Y appears when there is more dependence between X and Y when they are doing badly than when they exhibit typical performance. In this paper, we introduce an index to measure the contagion effects. This tool is based on the use of suitable copulas associated with the markets and on the calculation of the related conditional Spearman's correlation coefficients. As an empirical application, the proposed index is used to create a clustering of European stock market indices to assess their behavior in the recent years. The whole procedure is expected to be useful for portfolio diversification in crisis periods.

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