Measuring financial market risk contagion using dynamic MRS-Copula models: The case of Chinese and other international stock markets

Considering the asymmetric dependency structure and regime switching process, we construct the dynamic Markov Regime Switching Copula (MRS-Copula) models to measure the financial risk contagion. The dynamic MRS-Copula models consist of the marginal model and dynamic MRS Rotated-Gumbel function, and they are examined by the goodness-of-fit test method. Using the dynamic MRS-Copula models, we calculate the daily lower tail dependency by adopting the international stock market index data from January 1997 to June 2015, and provide evidence of financial risk contagion effects between Chinese stock market and other international stock markets after the reform of the RMB exchange rate system in China, and this is particular the case after in the U.S. sub-prime mortgage crisis and the European debt crisis. When conducting robust tests with weekly and monthly data, the empirical result basically holds. As for the financial risk contagion channels in Chinese stock market, the fundamental economic linkages play a more important role than liquidity, information and other factors. •We construct the dynamic MRS-Copula to measure financial risk contagion.•Financial risk contagion is measured by the lower tail dependence.•We provide the evidence of financial risk contagion between Chinese stock market and international stock markets.•Data frequency has a slight impact on the robustness of our results.