Testing for Financial Spillovers in Calm and Turmoil Periods

In this paper, we investigate financial spillovers between capital markets during calm and turbulent times. We explicitly define financial spillovers and financial contagion in accordance to the economic literature and construct statistical models corresponding to these definitions in the Markov switching framework. Applying the new testing methodology based on transition matrices, we find that spillovers from the US capital market to the UK, Japanese, and German markets are significant independently of whether the latter markets are in the state of calm or distress. However, we reject the hypothesis of strong financial contagion from the US market to the other markets. These results are robust to the choice of the analyzed period