DP2916 Asset Market Linkages in Crisis Periods

Author(s): Casper G de Vries , Philipp Hartmann , Stefan Straetmans

Publication Date: August 2001

Keyword(s): financial crises , systemic risk , contagion , market crashes , flight to quality , bivariate extreme value analysis , extreme co-movements

JEL(s): C49 , F30 , G10

Programme Areas: Financial Economics , International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2916.asp

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.