Measuring financial contagion: a directed acyclic graphs and error correction model. (1st January 2013)

• Record Type: Journal Article
• Authors: Jayech, Selma; Zina, Naceur Ben
• Is Part Of: International journal of business innovation and research. Volume 7:Number 1(2013)
• Page Start: 40
• Page End: 60
• Publication Date: 2013-01-01
• Subjects: directed acyclic graphs -- DAG -- forecast error variance decomposition -- financial contagion; Management science -- Research -- Periodicals; Industrial management -- Technological innovations -- Periodicals; Industrial management -- Research -- Periodicals; 658.0072
• Languages: English
• ISSNs: 1751-0252

Abstract

Vector autoregressions (VARs) are economically interpretable only when identified by being transformed into a structural form the (SVAR) in which the contemporaneous variables stand in a well-defined causal order. These identifying transformations are not unique. It is widely believed that practitioners must choose between them using a priori theory or other criteria not rooted in the data under analysis. We show how to apply graph-theoretical approach of searching for causal structure based on relations of conditional independence to select the possible causal orders – or at least to reduce the admissible them to a narrow equivalence class. This study investigates the dynamic structure of four major stock markets using an error correction model and directed acyclic graphs (DAG). The DAG representation provides a structure of causality among these markets in a contemporaneous time. Building this contemporaneous structure and the estimated error correction model, innovation accounting techniques are applied.