Analysis Of Sub-prime Loan Crisis Contagion Based On Local Correlation

As global economic and financial integration has been increasing, financial crisis occurred more frequently, especially from the1990s. In addition, most of these financial crisis have shown contagion. Therefore, the testing of financial contagion becomes more and more important and popular. There are many methods for testing the financial contagion, and the correlation coefficient is the earliest and most popular way to examine financial contagion. In this way, if compared with the pre-crisis, correlation coefficient during the crisis suddenly increases, then it represents that financial contagion exists. Otherwise, it represents that financial contagion does not exist. However, whether the Pearson correlation or the modified correlation has some disadvantages:First, most the Scholars determine whether the correlation coefficient during the crisis suddenly increases qualitatively, which may cause the subjective error. Second, it can not determine the period, during which the financial contagion exists. So this paper will focus on how to overcome these disadvantages.In this paper, Local correlation is used to examine financial contagion. First, we introduction related theories about financial contagion, which includes the definition of financial contagion, essential characteristics, transmission channels of financial contagion and existing theory for testing financial contagion.Then, we over-viewed related theories of the local correlation. In this part, we propose the local polynomial model for financial contagion. After constructing the local polynomial model, we introduce the method of estimating the local correlation based on the local polynomial model. In the end of this chapter, we also introduce how to estimate the financial contagion based on the estimated value of the local correlation.In the last part of the paper, an empirical analysis of sub-prime loan crisis contagion between the USA and six primary countries are presented by the method above, which verifies the feasibility of our methods, and some meaningful conclusions are also obtained. In this part, Hypothesis tests for financial contagion at different confidence levels are given and the degree of sub-prime loan crisis contagion are measured and the time when sub-prime loan crisis contagion starts and ends also determined, which overcome disadvantages of the Pearson correlation or the modified correlation mentioned above.