Working Paper

Contagion Testing in Embryonic Markets under Alternative Stressful US Market Scenarios

Scott M. R. Mahadeo, Reinhold Heinlein, Gabriella Deborah Legrenzi
CESifo, Munich, 2019

CESifo Working Paper No. 8029

We consolidate alternative ways for identifying stable and stressful scenarios in the S&P 500 market to construct contagion tests for recipient markets vulnerable to disturbances from this source market. The S&P 500 is decomposed into discrete conditions of: (1) Tranquil versus turbulent volatility; (2) Bull versus bear market phases; (3) Normal periods versus asset bubbles and crises. We analyse the relationship between the S&P 500 and major emerging Caribbean stock markets and find that, despite the prominent trade related exposure to the US, financial linkages are much less pronounced than might be expected outside of the Great Recession.

CESifo Category
Monetary Policy and International Finance
Energy and Climate Economics
Keywords: Caribbean, contagion, correlation, S&P 500, stock market, United States
JEL Classification: C580, G010