The Contagion Box: Measuring Financial Market Co-movements by Regression Quantiles

This paper develops a rigorous econometric framework to investigate the structure of co-dependences across markets and to test whether it changes over time or across market conditions. Our approach is based on the computation, over both a test and a benchmark period, of the conditional probability that the returns on one market are lower than a given quantile, when returns on the other market are also lower than their corresponding quantile, for any set of prespecified quantiles. Quantiles are allowed to vary over time using the CAViaR model. We illustrate the methodology by investigating the impact of the crises of the 1990s on the major Latin American equity markets. Our results suggest a significant degree of financial contagion during these crises.