Download or read book Modeling financial contagion using mutually exciting jump processes written by Yacine Aït-Sahalia and published by . This book was released on 2010 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 mathematically, we introduce a model for asset return dynamics with a drift component, a volatility component and mutually exciting jumps known as Hawkes processes. In the model, a jump in one region of the world or one segment of the market increases the intensity of jumps occurring both in the same region (self-excitation) as well as in other regions (cross-excitation). The model generates the type of jump clustering that is observed empirically. Jump intensities then mean-revert until the next jump. We develop and implement an estimation procedure for this model. Our estimates provide evidence for self-excitation both in the US market as well as in other world markets. Furthermore, we find that US jumps tend to get reflected quickly in most other markets, while statistical evidence for the reverse transmission is much less pronounced. Implications of the model for measuring market stress, risk management and optimal portfolio choise are also investigated.