Discussion Paper
No. 2011-15 | June 06, 2011
Irfan Akbar Kazi, Khaled Guesmi and Olfa Kaabia
Contagion Effect of Financial Crisis on OECD Stock Markets


In this paper we investigate the contagion effect between stock markets of U.S and sixteen OECD countries due to Global Financial Crisis (2007-2009). We apply Dynamic Conditional Correlation GARCH model Engle (2002) to daily stock price data (2002-2009). In order to recognize the contagion effect, we test whether the mean of the DCC coefficients in crisis period differs from that in the pre-crisis period. The identification of break point due to the crisis is made by Bai-Perron (1998, 2003) structural break test. We find a significant increase in the mean of dynamic conditional correlation coefficient between U.S and OECD stock markets under study during the crisis period for most of the countries. This proves the existence of contagion between the US and the OECD stock markets.

JEL Classification:

F41, F36, E44, F15

Cite As

Irfan Akbar Kazi, Khaled Guesmi, and Olfa Kaabia (2011). Contagion Effect of Financial Crisis on OECD Stock Markets. Economics Discussion Papers, No 2011-15, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2011-15

Comments and Questions

Massimiliano Caporin - On the modeling strategy
June 07, 2011 - 09:59
I have some concerns about the empirical analysis at the multivariate level. In fact, the selection of markets you pick are not syncronized. As a consequence, at the daily level, the Japan market closes before European ones open, and those are overlapping with the US. This induces the existence of contemporaneous mean relations between markets. In turn, those must be removed before focusing on the estimation of dynamic correlations, otherwise the elements you are evaluating (correlations) might be influenced by mean misspecification.Furthermore, I suggest you to consider asymmetry in the variances, which can be accomodated with a single additional parameter in the variance model (I'm thinking to the GJR-GARCH of Glosten, Jagannathan and Runkle).Finally, you should at least mention the work of Aielli (available at http://ssrn.com/abstract=1507743) since it shows an inconsistency problem in the DCC model of Engle, and possibly consider the Markov Switching work of Pelletier (2006), see also Lee (2010), J. of Banking and Finance.Those additional papers might be of interest: http://ssrn.com/abstract=968233http://ssrn.com/abstract=1020014

Anonymous - Reply to Massimiliano
February 09, 2012 - 21:49 | Author's Homepage
Thank you Massimiliano for your useful comments. There are certainly some modeling problems in this article as this was my first article. I am coming up with a completely new article on the same subject and I have incorporated your valuable suggestions. Thank you once again!!

Anonymous - Referee Report 1
July 11, 2011 - 13:42
See attached file

Anonymous - Reply to Comments
September 23, 2011 - 01:04
Dear Sir,Thank you for your highly valuable comments. Your comments have greatly added to our knowledge and we will try to come up with an improved version incorporating the changes required to answer your useful comments.Once again million thanks for your valuable comments.Best regardsIrfan A. Kazi

Anonymous - Referee Report 2
September 13, 2011 - 09:06
See attached file

Anonymous - Reply
September 23, 2011 - 00:57
Dear Referee,I have answered to some of your comments:1. Motivation and need of such a research has been presented at the end of Literature review.2. Citations are provide where required for example see Line number 13 inside the introduction paragraph. References are generally provided at the end of the research article or before annex, that is what we have followed. It is not possible for us to put the references at the beginning of the article. 3. The whole research article rotates around the global financial crisis, see for example the introduction of the research article that gives a nice picture of how the crisis evolved.4. It is common practice, please see econometric literature, it was not possible for us to elaborate on minor econometric practices which would loose the essence of the research article.5. Can you elaborate, what else do you expect?? This is how the methodology is presented, necessary equations have been given to clearly explain the methodology. 6. Nasdaq was prefered to S&P, because it better explains the crisis in U.S, a simple graph of both the markets would explain that. It is ridiculous to elaborate on this unnecessary stuff. It would waste the time of the general reader and most for the researchers. 7. What else could be explained in results, needs more elaboration!!8. Figures are necessary to highlight the break, and returns are normally displayed following the literature.9. Discriptive statistics are displayed in table 1.11. It shows, how the dynamic correlation behave in times of crisis in OECD Countries (with respect to stock markets). Which countries are most and least affected affected? This is not obvious and that is why we performed this research!!Regards