Conclusiones

Spillover is a broad concept, defined as changes in one financial market in response to changes in factors in other markets, no matter whether during a crisis or a tranquil period. It reflects co-movement of market returns. Spillover effects are transmissions due to links among markets. Moreover, spillover causes contagion, or, conversely, contagion is the consequence of extreme spillover (Allen and Gale, 2000, Alter and Beyer, 2014). That is, spillover is necessary but not sufficient for contagion.

Interdependence is a stable and elevated two-way link between markets, during tranquil and stress periods. Generally it is associated with fundamentals, and therefore is to be expected.

Contagion, as opposed to interdependence, suggests that the international propagation mechanisms are different during times of crisis. There is no agreement on the definition of contagion, and many definitions have been proposed. Referring

to the Forbes and Rigobon (2002) and World Bank’s classification, we can

distinguish three definitions of contagion:

4 _{CDS trading volume is published on the DTCC (Depository Trust and Clearance Corporation)}

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Broad definition

Contagion is identified with the general process of shock transmission across countries. It works in both tranquil and crisis periods and refers to general cross-country spillover effects. This definition has been used by, for example, Kaminsky and Reinhart (2000, 2003), Afonso et al. (2012), Alter and Schuler (2012), Alsakka and ap Gwilym (2012), Christopher et al. (2012) and De Santis (2012).

Restrictive definition

As probably the most controversial definition, contagion is the propagation of shocks between two markets in excess of what should be expected from the fundamentals and considering the co-movements triggered by the common shocks. The construction of the underlying fundamentals needs to be investigated, then, if this definition is to be adopted. Otherwise, we are not able to appraise effectively whether excess co-movements have occurred and then whether contagion is displayed. This definition was used by Favero and Giavazzi (2002) and Mink and de Haan (2013).

Very restrictive definition

Contagion should be interpreted as the change in the cross-country correlation/covariance that takes place during a period of turmoil. This definition is more neutral because it leaves out the problem of identifying the transmission mechanism and the fundamentals (and there is no agreement on the proper set of fundamentals). More importantly, this thesis is not the place in which to define “true”

fundamentals or “pure” contagion. This definition was used in the following

studies: Sander and Kleimeier (2003), Billio and Pelizzon (2003), Gande and Parsley (2005), Caceres et al. (2010), Arezki et al. (2011), Hassene and Kais (2011)

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Missio and Watzka (2011), Kalbaska and Gatkowski (2012). Caporin et al. (2013), Aizenman et al. (2013), Beirne and Fratzscher (2013), Alter and Beyer (2014) and Alter and Beyer (2014).

Many papers have focused on the question of contagion, and their approaches vary with regard to the definition of contagion. The third, narrow definition implies that contagious effects are to be differentiated from ‘normal’ transmissions of shocks across countries, also known as interdependencies. Following this widely used definition, the task of empirical contagion studies is to investigate whether or not interdependence and causality across countries are changed in certain crisis periods.

Four major categories of tests have been utilized for evidence of contagion and information transmission: correlation of asset prices, GARCH frameworks (volatility spillover), cointegration, and probit models. Our first empirical chapter applies the approach analysing correlations between markets (stock returns, interest rate, exchange rate, market indices). According to this approach, a significant increase in correlations may be considered proof of contagion. The second empirical chapter looks at volatility spillover using the GARCH framework, by focusing on changes in correlations/covariances.

A limitation of the existing literature is that many papers assume that transmission from one market to another is a one-way process. They are therefore unable to account for the direction of causality. However, price adjustment could happen in one of the two markets concerned, and lead to changes in the other. The concern of this thesis is not the factors affecting such interaction, but revealing the direction of price information transfer (the direction of causality). Furthermore, models using returns, a first differenced variable, lose information on a possible linear combination

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between level variables. The use of the cointegration technique can overcome the problem of non-stationary relations and support the investigation of two-way relations, in both first difference and level.

In one of the most relevant contagion studies to have used the cointegration approach, Sander and Kleimeier (2003) extended the conventional measures of contagion by investigating changes in the existence and direction of causality on sovereign bond spreads in four crises. They found support for regional contagion for the Asian crisis, and global contagion for the Russian crisis. Hassene and Kais (2011), using the restrictive definition of contagion, tested contagion through the foreign stock exchange markets of developed countries during 2006-2009. They also chose cointegration and the VAR approach to examine correlation and causality between these countries. Although Alter and Schuler (2012) use the broad definition of contagion, their research question and methodology were related to the present thesis. They investigated the interaction between government and bank spreads using causality and cointegration analysis, for four of the five PIIGS (not Greece), Germany, France and the Netherlands. They found that, before bank bailouts, contagion moved from banks to sovereigns. After bailouts, sovereign CDS spreads were more strongly affected in the short run by financial sector shock, but the impact became insignificant in the long term.