Contagion and Comovement – Does the Initiator Matter

• Main Author: Cărăușu Dumitru-Nicușor
• Format: Article
• Language: English
• Published: Ovidius University Press 2018-01-01
• Series: Ovidius University Annals: Economic Sciences Series
• Subjects: financial contagion; capital markets; financial crisis; wavelet analysis
• Online Access: http://stec.univ-ovidius.ro/html/anale/RO/wp-content/uploads/2019/02/3-4.pdf

We use the wavelet analysis in order to test the presence of financial contagion between three developed Western European capital markets and the Romanian capital market in the recent financial crisis. We test the presence of contagion between the Romanian market and the German, French and United Kingdom markets using wavelet based framework. Our results indicate pure and fundamental contagion between all the Western European capital markets and the Romanian market. Furthermore, we found that there aren’t any significant differences when we take into consideration the initiator as the Romanian capital market reacted in a similar manner towards all the markets in the analysis. Thus, during the sub-prime crisis, the Lehman Brothers collapse or the sovereign debt crisis the initiator didn’t matter as the effects were similar in the Romanian market. This implies that the Romanian market is sensitive to short-term shocks from the Western European capital markets, which leads to a long-term fundamental contagion.