Prediction of financial contagion: Do chinese stock markets synchronize before the onset of crisis?

The increasing evidences have proved that the financial market is a multi-level nonlinear dynamical system constituted by financial subsystems which coupling with extensive connections. The obvious property of nonlinear and complex of the system would transmit the contagion instantaneously while financial crisis erupted. In this paper, we consider financial markets as stochastic oscillators that are synchronized in the normal times; however, the strength of synchronization increases during financial contagion. Using the FFT based measure of phase synchronization method, it is feasible for an analyst, with a scant knowledge of the underlying dynamics of two dynamical systems, to show whether or not the systems are synchronized. This study applies these techniques in testing for phase synchronization of three Chinese stock markets: Shanghai, Shenzhen, and Hong Kong. The empirical results of the present study indicate that the synchronization strength increasing apparently before the financial crisis onset, it not only can be used as the evidence of the contagion, but also can suggest the possibility that the crisis may be more severe and even burst comprehensively.