Correlation Analysis of Financial Contagion: What One Should Know Before Running a Test

Figure 6: Hong Kong - Philippines threshold function

5.1.2 The case of variable variance ratios

Allowing the variance ratio to vary between the tranquil and the crisis period,
i.e. Aj' — A_j∙, equation (9) can be rewritten as

Î(1 + ^a,) + (ʌj
(1 + ʌɑ)

ʌɑ)

(1 + ^λ- )] (τ+Γ )

∖ ^{1 + A} ' J

- (⅛⁺ι) (^{1 +} *)^-0∙

_η ∙.₁  ∙    ,∙.∙_j,   ₁.n ʃ

which implicitly defines A

as a function of A_j∙. Figure 6 graphs this implicit

function for the case of Hong Kong and the Philippines. For any pair (A_j∙, A^a')
above the function, the test will reject the hypothesis of interdependence. For
any pair (Aj,A^') below the function, the test will accept the null. The pair
at the crossing between the function and the 45^o degree line from the origin,
identifies the threshold A reported in table 1.

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