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      Multi-feature evaluation of financial contagion

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          Abstract

          Financial contagion refers to the spread of market turmoils, for example from one country or index to another country or another index. It is standardly assessed by modelling the evolution of the correlation matrix, for example of returns, usually after removing univariate dynamics with the GARCH model. However, significant events like crises visible in one financial market are usually reflected in other financial markets/countries simultaneously in several dimensions, i.e., in general, entire distributions of returns in other markets are affected. These distributions are determined/described by their expected value, variance, skewness, kurtosis and other statistics that determine the shape of the distribution function of returns, which can be based on higher (mixed) moments. These descriptive statistics are not constant over time, and, moreover, they can interreact within the given market and among the markets over time. In this article we propose, and use for the daily values of five indexes (CAC40, DAX30, DJIA, FTSE250 and WIG20) over the time period 2006–2017, a new, simple and computationally inexpensive methodology to automatically extend contagion evaluation from the evolution of the correlation matrix to the evolution of multiple higher mixed moments as well. Specifically, the joint distribution of normalized variables for each pair of indexes is modeled as a polynomial with time evolving coefficients estimated using an exponential moving average. As we can obtain any arbitrary number of evolving mixed moments this way, its dimensionality reduction using PCA (principal component analysis) is also discussed, obtaining a lower number of dominating and relatively independent features, which can each be interpreted through a polynomial that describes the corresponding perturbation of joint distribution. We obtain features that describe the interrelations among stock markets in several dimensions and that provide information about the current stage of crisis and the strength of the contagion process.

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          Dynamic Conditional Correlation

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            Computation and analysis of multiple structural change models

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              No Contagion, Only Interdependence: Measuring Stock Market Comovements

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                Author and article information

                Contributors
                jaroslaw.duda@uj.edu.pl
                henryk.gurgul@gmail.com
                robert.syrek@uj.edu.pl
                Journal
                Cent Eur J Oper Res
                Cent Eur J Oper Res
                Central European Journal of Operations Research
                Springer Berlin Heidelberg (Berlin/Heidelberg )
                1435-246X
                1613-9178
                18 June 2021
                18 June 2021
                : 1-28
                Affiliations
                [1 ]GRID grid.5522.0, ISNI 0000 0001 2162 9631, Institute of Computer Science, Faculty of Mathematics and Computer Science, , Jagiellonian University in Krakow, ; ul. Prof. S. Lojasiewicza 6, 30-348 Kraków, Poland
                [2 ]GRID grid.9922.0, ISNI 0000 0000 9174 1488, Department of Applications of Mathematics in Economics, Faculty of Management, , AGH University of Science and Technology, ; Gramatyka 10 St., 30-067 Kraków, Poland
                [3 ]GRID grid.5522.0, ISNI 0000 0001 2162 9631, Institute of Economics, Finance and Management, Faculty of Management and Social Communication, , Jagiellonian University in Krakow, ; ul. Prof. S. Lojasiewicza 4, 30-348 Kraków, Poland
                Author information
                http://orcid.org/0000-0001-9559-809X
                http://orcid.org/0000-0002-6192-2995
                http://orcid.org/0000-0002-8212-8248
                Article
                756
                10.1007/s10100-021-00756-3
                8212798
                99f87556-5478-4bdd-8b77-d78c5f9d8391
                © The Author(s) 2021

                Open AccessThis article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.

                History
                : 5 June 2021
                Categories
                Article

                contagion,nonstationarity analysis,conditional correlation,hierarchical correlation reconstruction/hcr/,principal component analysis,feature extraction,g01,g11,g15

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