On the structure of financial contagion: Econometric tests and Mercosur evidence

We introduce a flexible copula-based semi-parametric test of financial contagion that is capable of capturing structural shifts in the transmission channel of shocks across a network of financial markets beyond the increase in the intensity of time-varying dependence. We illustrate the capabilities of the proposed test using returns of stock, money, sovereign debt, and foreign exchange markets of seven Latin-American countries, and test for the presence of pure contagion effects for each major financial crisis that affected the Mercosur region between 1994 and 2001. Besides strong evidence in favor of time-varying market interdependence, we cannot rule out the presence of pure contagion effects in the stock market transmission channel associated with the Mexican, Asian, and Russian financial crises.