A Dynamic Conditional Correlation Analysis of Financial Contagion: The Case of the Subprime Credit Crisis

Abstract

This paper uses a Dynamic Conditional Correlation Model to examine financial contagion phenomenon following the American subprime crisis. This model, which is developed by Engle (2001, 2002), Engle and Sheppard (2001) and Tse and Tsui (2002) as an original specification of multivariate models’ conditional correlations, allows tracking correlation evolutions between two or more assets. Our sample consists of six developed countries, including the crisis-originating American market, and ten emerging countries. Data frequencies are on a daily basis reflecting the January 3 rd 2006 to February 26 th 2010 period. The obtained results seem to point to an amplification of dynamic conditional correlations during the crisis period which stretches from August 1 st 2007 to February 26 th 2010.