Financial Contagion Crisis Effect of Subprime on G7: Evidence through the Adjusted Correlation Test and Non-linear Error Correction Models (ECM)

Abstract

The objective of this study is to test the presence of the contagion phenomenon during the US subprime crisis. We adopt the test of adjusted correlation coefficients between markets and propose a new procedure which involves testing the non-linearity of the propagation mechanisms shocks, estimated with a model of long-term interdependence. We apply this methodology to the financial markets which measure the risk perception. Our results prove the existence of some cases of the contagion phenomenon between the financial markets of G7 countries.