Dynamic analysis of financial market contagion Lee, Hee Soo; Kim, Tae Yoon;
We propose methodology to analyze the dynamic mechanisms of financial market contagion under market integration using a biological contagion analytical approach. We employ U-statistic to measure market integration, and a dynamic model based on an error correction mechanism (single equation error correction model) and latent factor model to examine market contagion. We also use quantile regression and Wald-Wolfowitz runs test to test market contagion. This methodology is designed to effectively handle heteroscedasticity and correlated errors. Our simulation results show that the single equation error correction model fits well with the linear regression model with a stationary predictor and correlated errors.
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