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Title: On testing financial contagion and modelling time-varying volatility interactions Authors:  Cristina Amado - University of Minho (Portugal) [presenting]
Abstract: Volatility contagion is analyzed by testing significant increases in cross-market correlations of return volatilities. For modelling the dynamics of the volatility interactions, we propose an additive time-varying (or partially time-varying) structure in which a time-dependent component is added to the extended vector GARCH process. In this setting, the co-dependence in volatility is allowed to change smoothly between two extreme volatility regimes and contagion is identified from these crisis-contingent structural changes. A Lagrange multiplier type test of volatility contagion is proposed for testing the null hypothesis of constancy co-dependence against a smoothly time-varying interdependence. Finite sample properties of the proposed test statistic are investigated by Monte Carlo experiments.