@article{eb029c2675fc4fd0bd442221ae46de8a,
title = "Modeling financial contagion using mutually exciting jump processes",
abstract = "We propose a model to capture the dynamics of asset returns, with periods of crises that are characterized by contagion. In the model, a jump in one region of the world increases the intensity of jumps both in the same region (self-excitation) as well as in other regions (cross-excitation), generating episodes of highly clustered jumps across world markets that mimic the observed features of the data. We develop and implement moment-based estimation and testing procedures for this model. The estimates provide evidence of self-excitation both in the US and the other world markets, and of asymmetric cross-excitation, with the US market typically having more influence on the jump intensity of other markets than the reverse. We propose filtered values of the jump intensities as a measure of market stress and examine their out-of-sample forecasting abilities.",
keywords = "Contagion, Crisis, Hawkes process, Jumps, Self- and mutually exciting processes",
author = "Yacine A{\"i}t-Sahalia and Julio Cacho-Diaz and Laeven, {Roger J.A.}",
note = "Funding Information: We are very grateful for the comments of the Editor and an anonymous referee. We are also grateful to seminar and conference participants at the Chinese University in Hong Kong, City University of London, Columbia, Cornell, HEC Paris, HKUST, LSE, Nanyang Technological University, National University of Singapore, Princeton, Seoul National University, Singapore Management University, Tilburg, Toulouse, University of Amsterdam, University of Melbourne, University of Technology Sydney, the AFMATH Conference in Brussels, the Cambridge-Princeton Conference, the Credit Risk Conference in Venice, the Econometric World Congress in Shanghai, the TCF Workshop on Lessons from the Credit Crisis, the SoFiE Conference in Melbourne, the WONDER Research Afternoon in Tilburg, and in particular to Kenneth Lindsay, for their comments and suggestions. This research was funded in part by the NSF under Grant SES-0850533 (A{\"i}t-Sahalia) and by the NWO under Grants Veni-2006 and Vidi-2009 (Laeven). Matlab code to implement the estimation procedure developed in this paper is available from the authors upon request. Publisher Copyright: {\textcopyright} 2015 Elsevier B.V.",
year = "2015",
month = sep,
day = "1",
doi = "10.1016/j.jfineco.2015.03.002",
language = "English (US)",
volume = "117",
pages = "585--606",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "3",
}