DP2916 Asset Market Linkages in Crisis Periods

Author(s): Casper G de Vries, Philipp Hartmann, Stefan Straetmans
Publication Date: August 2001
Keyword(s): bivariate extreme value analysis, contagion, extreme co-movements, financial crises, flight to quality, market crashes, systemic risk
JEL(s): C49, F30, G10
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2916

We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this non-parametric measure is not predisposed towards the normal distribution and can account for non-linear relationships. Our estimates for the G-5 countries suggest that simultaneous crashes in stock markets are about two times more likely than in bond markets. Moreover, stock-bond contagion is about as frequent as flight to quality from stocks into bonds. Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration.