An Analysis of the Dependence Among Financial Markets by Spatial Contagion

Spatial contagion between two financial marketsX and Y appears when there is more dependence betweenX and Y when they 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 Spearman’s correlation coefficients. As an empirical application, the proposed index is exploited to create a clustering of European stock market indices in order to assess their behaviour in the recent years. The whole procedure is expected to be useful for portfolio diversification in crisis periods.