Working Paper: CEPR ID: DP2916
Authors: Philipp Hartmann; Stefan Straetmans; Casper G. de Vries
Abstract: 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.
Keywords: financial crises; systemic risk; contagion; market crashes; flight to quality; bivariate extreme value analysis; extreme comovements
JEL Codes: G10; F30; C49
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| simultaneous crashes in stock markets (G01) | significant relationship between stock and bond markets during crises (G01) |
| stock-bond contagion (G10) | flight-to-quality phenomenon (E32) |
| G5 stock markets experience co-crashes (G01) | frequency of co-crashes during crisis periods (G01) |
| frequency of crashes and co-crashes (C10) | higher than expected under normal distribution (C46) |
| systemic propagation of financial crises across borders (F65) | limited cross-border crisis linkages (F55) |