Estimados,
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Explosive Volatility: A Model of Financial Contagion
This paper proposes a model of financial contagion that accounts for explosive, mutually exciting shocks to market volatility. We fit the model using country-level data during the European sovereign debt crisis, which has its roots in the period 2008–2010, and was continuing to affect global markets as of October, 2011. Our analysis shows that existing volatility models are unable to explain two key stylized features of global markets during presumptive contagion periods: shocks to aggregate market volatility can be sudden and explosive, and they are associated with specific directional biases in the cross-section of country-level returns. Our model repairs this deficit by assuming that the random shocks to volatility are heavy-tailed and correlated cross-sectionally, both with each other and with returns.
We find evidence for significant contagion effects during the major EU crisis periods of May 2010 and August 2011, where contagion is defined as excess correlation in the residuals from a factor model incorporating global and regional market risk factors. Some of this excess correlation can be explained by quantifying the impact of shocks to aggregate volatility in the cross-section of expected returns—but only, it turns out, if one is extremely careful in accounting for the explosive nature of these shocks. We show that global markets have time-varying cross-sectional sensitivities to these shocks, and that high sensitivities strongly predict periods of financial crisis. Moreover, the pattern of temporal changes in correlation structure between volatility and returns is readily interpretable in terms of the major events of the periods in question.
Link al Paper
Integration and Contagion in US Housing Markets
Abstract:
This paper explores integration and contagion among US metropolitan housing markets. The analysis applies Federal Housing Finance Agency (FHFA) house price repeat sales indexes from 384 metropolitan areas to estimate a multi-factor model of U.S. housing market integration. It then identifies statistical jumps in metropolitan house price returns as well as MSA contemporaneous and lagged jump correlations. Finally, the paper evaluates contagion in housing markets via parametric assessment of MSA house price spatial dynamics.
A R-squared measure reveals an upward trend in MSA housing market integration over the 2000s to approximately .83 in 2010. Among California MSAs, the trend was especially pronounced, as average integration increased from about .55 in 1997 to close to .95 in 2008! The 2000s bubble period similarly was characterized by elevated incidence of statistical jumps in housing returns. Again, jump incidence and MSA jump correlations were especially high in California. Analysis of contagion among California markets indicates that house price returns in San Francisco often led those of surrounding communities; in contrast, southern California MSA house price returns appeared to move largely in lock step.
The high levels of housing market integration evidenced in the analysis suggest limited investor opportunity to diversify away MSA-specific housing risk. Further, results suggest that macro and policy shocks propagate through a large number of MSA housing markets. Research findings are relevant to all market participants, including institutional investors in MBS as well as those who regulate housing, the housing GSEs, mortgage lenders, and related financial institutions.
Link al Paper.
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