Does the U.S. exercise contagion on Italy? A theoretical model and empirical evidence
This paper deals with the theme of contagion in financial markets. At this aim, we develop
a model based on Mixed Poisson Processes to describe the abnormal returns of financial
markets of two considered countries. In so doing, the article defines the theoretical
conditions to be satisfied in order to state that one of them – the so-called leader –
exercises contagion on the others — the followers. Specifically, we employ an invariant
probabilistic result stating that a suitable transformation of a Mixed Poisson Process is still
a Mixed Poisson Process. The theoretical claim is validated by implementing an extensive
simulation analysis grounded on empirical data. The countries considered are the U.S. (as
the leader) and Italy (as the follower) and the period under scrutiny is very large, ranging
from 1970 to 2014