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Modeling financial contagion using mutually exciting jump processes
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DOI：10.1016/j.jfineco.2015.03.002.png)
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Abstract
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We propose a model to capture the dynamics of asset returns, with periods of crises that are characterized by contagion. In the model, a jump in one region of the world increases the intensity of jumps both in the same region (self-excitation) as well as in other regions (cross-excitation), generating episodes of highly clustered jumps across world markets that mimic the observed features of the data. We develop and implement moment-based estimation and testing procedures for this model. The estimates provide evidence of self-excitation both in the US and the other world markets, and of asymmetric cross-excitation, with the US market typically having more influence on the jump intensity of other markets than the reverse. We propose filtered values of the jump intensities as a measure of market stress and examine their out-of-sample forecasting abilities. (C) 2015 Elsevier B.V. All rights reserved.
Keywords:
Jumps
Contagion
Crisis
Hawkes process
Self- and mutually exciting processes
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