A wavelet-based approach to test for financial market contagion

Time-Scale Analysis of Sovereign Bonds Market Co-Movement in the EU

“…The confidence intervals are not overlapping, thus we detected change in the correlation structure. It is in not a contagion in a sense of (Gallegati, 2012), but the debt market disintegration. On the other hand, we can say that the contagion of fear disintegrated the sovereign bond market significantly for these four pairs.…”

“…We use the same two dates as in the wavelet coherence analysis -the fall of Lehman Brothers and the announcement of the new budget deficit. For a brief introduction of discrete wavelet transform and wavelet correlation see Appendix C and Appendix D. Now, let us briefly describe the testing procedure proposed by Gallegati (2012). At first we select the exact point in time, when we expect the contagion began.…”

“…For example, scale λ 1 represent short investment horizon with the period of 2-4 days. Further advantage of this wavelet based method is its robustness to non-Gaussian features of data (Gallegati, 2012). It is clear that hypothesis will be rejected, and thus change of correlation at scales detected, if confidence intervals of pre-crisis and after-crisis correlation do not overlap.…”

“…The question how to detect contagion has been presented in economics since seminal works written by Calvo and Reinhart (1996) and Eichengreen et al (1996). Gallegati (2012) provides a list of various techniques, which are used for its identification (multivariate GARCH, copula or probit to name a few). Moreover, he points out that standard time-domain techniques have problems with distinguishing between a co-movement and a contagion.…”

A Wavelet Transformation Approach to Crude Oil Price and CZK/Usd Exchange Rate Dependence

“…But on the markets operate different agents with different "behavior" horizon. In the short run the connection is from contagion reason, on the other hand the long term is associated with the co-movement or independency (Gallegati, 2012). It depends on whether the country is oil-importer or exporter and also whether the country´s industry is oil intensive or not.…”