On the subprime crisis and the Latin American financial markets: A regime switching skew-normal approach

This article analyses the potential occurrence of financial contagion in Latin American markets from the recent U.S. subprime crisis. Distinctively from the usual empirical approaches for contagion analyses, a regime-switching skew-normal model is implemented in order to assess both correlation and coskewness contagion as well as investigate the occurrence of structural breaks in the moments of the mean, variance and skewness. Even though correlation contagion was observed in all selected Latin American markets, coskewness contagion was only detected in Brazil. Variance structural breaks were found in all financial markets while structural breaks in the mean were only detected in Argentinian, Mexican and the U.S. markets. Yet, joint contagion and structural break tests suggested the occurrence of these phenomena in all considered markets.