A Markov switching analysis of contagion in the EMS
AbstractThis paper applies the multivariate version of the Forbes and Rigobon (2002) contagion test, as proposed by Dungey etÂ al. (2005a), to detect contagion effects in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). Crisis and non-crisis observations are determined endogenously via a Markov-switching vector autoregression (MSVAR). We show that the MSVAR is suitable for this purpose, as it does particularly well in identifying the 11 realignments of the ERM. We examine whether Denmark's rejection of the Maastricht Treaty and Italy's competitiveness problems affected other EMS participants and find evidence for contagion.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 29 (2010)
Issue (Month): 6 (October)
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Web page: http://www.elsevier.com/locate/inca/30443
Currency crisis Contagion Markov switching Foreign exchange;
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