Determination of the Time of Contagion in Capital Markets Based on the Switching Model

Abstract

This article attempts to compare conclusions made about market contagion based on the periods indicated by using the Markov-switching model and based on a range for unconditional correlations as well as on arbitrary arrangements. DCC-model was used to control for correlation change over time. Determination of extremely high correlations by using a range for unconditional correlations and the MS(3) switching model yields similar results regarding conclusions about the occurrence of the process of contagion in a market. Conclusions about contagion are, however, made at a higher significance level in the case of the switching model.