Contagion between US and Asian Stock Markets

Purpose - The purpose of this paper is examined for detecting financial crisis and contagion between countries by capturing in the mean-shift, variance-shift and skewness-shift parameters of an asset and through the covariance-shift, and co-skewness-shift of an asset, respectively. Design/methodology/approach - A regime switching skew-normal model of crisis and contagion is provided by relaxing the assumption of multivariate normality with a multivariate skew-normal distribution. The model is illustrated through an application to contagion between US and Asian stock markets during the global financial crisis. Findings - The results show that coskewness contagion dominates correlation contagion, but that the traditional correlation coefficient is not significant in all cases except China, invalidating the use of the correlation coefficient as a first measure of contagion. A flight to safety to the US is also evident in the significance of breaks in the skew-ness parameter in the crisis regime. Research implications or Originality - All channels of contagion and structural breaks are significant when considered jointly, reinforcing the need to consider contagion and structural breaks during crises in a multivariate setting.