Modeling Financial Contagion Using Mutually Exciting Jump Processes ∗

@inproceedings{AtSahalia2010ModelingFC,
  title={Modeling Financial Contagion Using Mutually Exciting Jump Processes ∗},
  author={Yacine A{\"i}t-Sahalia and Julio Cacho-Diaz},
  year={2010}
}
Adverse shocks to stock markets propagate across the world, with a jump in one region of the world seemingly causing an increase in the likelihood of a different jump in another region of the world. To capture this effect, we propose a model for asset return dynamics with a drift component, a stochastic volatility component and mutually exciting jumps known as Hawkes processes. In the model, a jump in one region of the world increases the intensity of jumps occurring both in the same region… CONTINUE READING
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