- Modeling financial contagion using mutually exciting jump processes
- Journal of Financial Economics
- Volume | Issue number
- 117 | 3
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Amsterdam Business School Research Institute (ABS-RI)
We propose a model to capture the dynamics of asset returns, with periods of crises that are characterized by contagion. In the model, a jump in one region of the world increases the intensity of jumps both in the same region (self-excitation) as well as in other regions (cross-excitation), generating episodes of highly clustered jumps across world markets that mimic the observed features of the data. We develop and implement moment-based estimation and testing procedures for this model. The estimates provide evidence of self-excitation both in the US and the other world markets, and of asymmetric cross-excitation, with the US market typically having more influence on the jump intensity of other markets than the reverse. We propose filtered values of the jump intensities as a measure of market stress and examine their out-of-sample forecasting abilities.
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