Shift contagion and minimum causal intensity portfolio during the COVID-19 and the ongoing Russia-Ukraine conflict

Using the TYDL causality test, this paper attempts (i) to investigate the existence of shift contagion among a large spectrum of financial markets during recent stress and stress-free periods and (ii) to propose a new approach of portfolio management based on the minimization of the causal intensity. During the COVID-19 crisis period, the shift contagion analysis not only reveal a tripling of the causal links between the markets studied, but also a change in the causal structure. Beyond the initial impact of the COVID-19 crisis on financial markets, policy interventions seem to have helped in reassuring market participants that the further spread of financial stress would be mitigated. However, the Russian-Ukrainian conflict, and the high degree of uncertainty it entailed, has again exacerbated the interdependencies between financial markets. In terms of portfolio analysis, our minimum-causal-intensity approach records a lower (respectively higher) reward-to-volatility ratio than the Markowitz (1952 & 1959) minimum-variance traditional approach during the pre-COVID-19 (respectively pre-war) period. On the other hand, both approaches, the one we propose in this paper and the minimum-variance approach, record negative reward-to-volatility ratios during crisis periods.

Transmission of the Greek crisis on the sovereign debt markets in the euro area

We test for the contagion effects stemming from the Greek debt crisis in the daily 10-year sovereign bond yield spreads in nine Economic and Monetary Union (EMU) countries. To this end, we estimate the dynamic conditional correlation (DCC) model of Engle (2002) from January 01, 2003 to December 31, 2015. In addition, we calculate and plot the upper and lower bounds of the confidence interval for each DCC series. To the best of our knowledge, this approach of Kchaou and Bellalah (2020) has never been used to study the contagion of the subprime and Greek crises between the 10-year sovereign bond yield spreads of the main EMU countries. Consequently, this approach enables us to compare our results with those of previous works based on other methods. It also offers useful insights to policy makers to address the contagion effect through the implementation of adequate measures. Although the Greek spread played the role of a global factor for the majority of countries during the observation period, the results invalidate the existence of contagious episodes resulting from the Hellenic crisis. We justify these findings either by the weakness of the weight of the Greek economy in the euro area or by the effectiveness of the unconventional monetary policies taken by the European Central Bank (ECB), the bailouts for Greece in 2010, 2012 and 2015 and the austerity measures and structural reforms implemented by the governments of EMU countries. Moreover, DCC between Greece and the other countries have shown a downward behavior during the acute phases of Greek crisis, suggesting a disintegration of the Hellenic bond market with those of other euro area countries during periods of financial turmoil. Furthermore, the results indicate that the subprime crisis affected a large part of these markets well before the bankruptcy of Lehman Brothers. All these findings provide valuable information for international investors, central bankers and policymakers.