Testing for Contagion of the Subprime Financial Crisis under Asymmetric Dynamics

Within a forward forecast test on Dynamic Conditional Correlation (DCC), we investigate the contagion of the subprime financial crisis between American, European and Asian stocks under asymmetry. In order to study this phenomenon we will follow these stages: Firstly we will use the Iterated Cumulative Sums of Squares (ICSS) algorithm to detect the structural breaks of market returns. Secondly we will create dummy variables for breaks, estimate EGARCH model of conditional generalized error distribution, and compute dynamic conditional correlation coefficients of DCC multivariate GARCH model. Finally we will employ "One step" and "N-step" forecast test to check the contagion effect. The results we have found show the asymmetric leverage effect of the American, European and Japanese stock Indices. However, we can conclude that there are two categories of contagion, ''positive'' and ''negative'' among different markets.