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A Smooth Transition Sem Approach To Measure Contagion In International Markets\, Anjeza Kadilli, Jaya Krishnakumar
A Smooth Transition Sem Approach To Measure Contagion In International Markets\, Anjeza Kadilli, Jaya Krishnakumar
Anjeza Kadilli
There is extensive empirical evidence that market linkages strengthen during crises. Understanding market contagion can be of great importance for policy and portfolio diversification decisions, especially during the recent turmoil periods. The aim of this paper is to investigate in an asset-pricing perspective the cross-asset and the cross-country contagion in the sovereign Credit Default Swap market and in the banking sector for the euro area, U.S., U.K. and Switzerland. Based on the nonlinear Simultaneous Equation Model of Pesaran and Pick (2007) we formulate a more flexible setting in which the contagion effect is transmitted in a smooth manner. Our model …