Enrico Foscolo

An Analysis of the Dependence Among Financial Markets by Spatial Contagion

Spatial contagion between two financial markets X and Y appears when there is more dependence between X and Y when they are doing badly than when they exhibit typical performance. In this paper, we introduce an index to measure the contagion effects. This tool is based on the use of suitable copulas associated with the markets and on the calculation of the related conditional Spearmans correlation coefficients. As an empirical application, the proposed index is used to create a clustering of European stock market indices to assess their behavior in the recent years. The whole procedure is expected to be useful for portfolio diversification in crisis periods.

A spatial contagion measure for financial time series

A novel spatial contagion measure is proposed that is based on the calculation of suitable conditional Spearmans correlations extracted from the financial time series of interest. Algorithms for the numerical estimation of this measure are illustrated, together with a simulation study showing its features in relations with popular families of copulas. Finally, two applications are presented about the use of spatial contagion measure for determining (asymmetric) linkages in the financial systems, and creating clusters of financial time series. In particular, contrarily to previous approaches in the literature, such clusters identify which time series increase their (positive) association when the market is under distress. The presented methodology is also expected to be useful to select a diversified portfolio of asset returns.

A Spatial Contagion Test for Financial Markets

By using some ideas recently introduced by Durante and Jaworski, we present a test for spatial contagion among financial markets. This test is based on a comparison between threshold copulas associated with a given pair of random variables representing two financial markets. Moreover, the described methodology is used in order to check the presence of contagion among European markets in the recent financial crisis.

A method for constructing higher-dimensional copulas

For every n≥3, a method is introduced and investigated for generating n-dimensional copulas starting with an (n−1)-dimensional copula already known. These copulas are particularly useful when the behaviour of a random vector (X 1, X 2, …, X n−1) formed by n−1 components is known, but another random variable, say X n , should be included into the model. An illustration of the usefulness of this construction is presented, showing some of its computational features.

A portfolio diversification strategy via tail dependence clustering

We provide a two-stage portfolio selection procedure in order to increase the diversification benefits in a bear market. By exploiting tail dependence-based risky measures, a cluster analysis is carried out for discerning between assets with the same performance in risky scenarios. Then, the portfolio composition is determined by fixing a number of assets and by selecting only one item from each cluster. Empirical calculations on the EURO STOXX 50 prove that investing on selected assets in trouble periods may improve the performance of risk-averse investors.

Connectedness Measures of Spatial Contagion in the Banking and Insurance Sector

We present some connectedness measures for an economic system that are derived from the spatial contagion measure. These measures are calculated directly from time series data and do not require any parametric assumption. The given definitions are illustrated in an empirical analysis of the behavior of European banking and insurance sector in the recent years.

A Multivariate Analysis of Tourists’ Spending Behaviour

According to the micro-economic theories regarding consumption behaviour, the determinants affecting the joint propensity of purchasing different goods and services are investigated. For this purpose, a copula-based model is suggested to understand how different expenditure categories are dependent with each other. A real application drawn from the tourism field illustrates the proposed approach and shows its main advantages. The findings could guide local practitioners and managers in creating new promotional campaigns able to attract visitors willing to pay on a bundle of goods and services correlated with each other.

Dependence between Stock Returns of Italian Banks and the Sovereign Risk

We analyze the interdependence between the government yield spread and stock returns of the banking sector in Italy during the years 2003–2015. In a first step, we find that the Spearman’s rank correlation between the yield spread and the Italian banking system changed significantly after September 2008. According to this finding, we split the time window in two sub-periods. While we show that the dependence between the banking industry and changes in the yield spread increased significantly in the second time interval, we find no contagion effects from changes in the yield spread to returns of the banking system.