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No Contagion, Only Interdependence: Measuring Stock Market Comovements

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  • Kristin J. Forbes
  • Roberto Rigobon

Abstract

Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.

Suggested Citation

  • Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2223-2261
    DOI: 10.1111/0022-1082.00494
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    References listed on IDEAS

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