Correlation meets causality: A holistic measure of financial contagion
FINANCE RESEARCH LETTERS, vol.65, 2024 (SSCI, Scopus)
- Publication Type: Article / Article
- Volume: 65
- Publication Date: 2024
- Doi Number: 10.1016/j.frl.2024.105503
- Journal Name: FINANCE RESEARCH LETTERS
- Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, ABI/INFORM
- Hacettepe University Affiliated: No
Abstract
This study introduces a new measure of financial contagion. We argue that a rapid increase in correlations between two series is necessary but not sufficient for contagion to occur, and develop a contagion test that combines dynamic conditional correlations with time-varying Granger causality. We empirically illustrate our new approach using systemic risk data covering the period 1996 - 2023. We show that there are periods when correlations increase rapidly without causality, as well as periods when causality is present but correlations do not increase. The proposed test enables data-driven detection of contagion episodes and provides a clear distinction between interconnectedness and contagion.