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A New Approach to Measuring Financial Contagion

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Author Info
Kee-Hong Bae
G. Andrew Karolyi
René M. Stulz

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Abstract

This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed. Copyright 2003, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhg012
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 16 (2003)
Issue (Month): 3 (July)
Pages: 717-763
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Handle: RePEc:oup:rfinst:v:16:y:2003:i:3:p:717-763

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  1. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July. [Downloadable!] (restricted)
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  2. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  3. Robert F. Engle & Takatoshi Ito & Wen-Ling Lin, 1991. "Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market," NBER Working Papers 2609, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Pownall, Rachel A. J. & Koedijk, Kees G., 1999. "Capturing downside risk in financial markets: the case of the Asian Crisis," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 853-870, December. [Downloadable!] (restricted)
  5. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 5-33. [Downloadable!] (restricted)
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  6. R. Gaston Gelos & Ratna Sahay, 2001. "Financial market spillovers in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(1), pages 53-86, March. [Downloadable!] (restricted)
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  7. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  8. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November. [Downloadable!] (restricted)
  9. Karolyi, G Andrew & Stulz, Rene M, 1996. " Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-86, July. [Downloadable!] (restricted)
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  10. Stiglitz, Joseph, 1998. "Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 3-22, Spring. [Downloadable!] (restricted)
  11. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Taimur Baig & Ilan Goldfajn, 1998. "Financial Market Contagion in the Asian Crisis," IMF Working Papers 98/155, International Monetary Fund.
  13. Bae, Kee-Hong & Andrew Karolyi, G., 1994. "Good news, bad news and international spillovers of stock return volatility between Japan and the U.S," Pacific-Basin Finance Journal, Elsevier, vol. 2(4), pages 405-438, December. [Downloadable!] (restricted)
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  14. Jón Daníelsson & Casper G. de Vries, 1998. "Value-at-Risk and Extreme Returns," Tinbergen Institute Discussion Papers 98-017/2, Tinbergen Institute. [Downloadable!]
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  15. Eun, Cheol S. & Shim, Sangdal, 1989. "International Transmission of Stock Market Movements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 241-256, June. [Downloadable!]
  16. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(3), pages 507-38. [Downloadable!] (restricted)
  17. Brian H. Boyer & Michael S. Gibson & Mico Loretan, 1997. "Pitfalls in tests for changes in correlations," International Finance Discussion Papers 597, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  18. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(2), pages 281-307. [Downloadable!] (restricted)
  19. Susmel, Raul & Engle, Robert F., 1994. "Hourly volatility spillovers between international equity markets," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 3-25, February. [Downloadable!] (restricted)
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  20. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June. [Downloadable!] (restricted)
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  21. Garry J. Schinasi & T. Todd Smith, 1999. "Portfolio Diversification, Leverage, and Financial Contagion," IMF Working Papers 99/136, International Monetary Fund.
  22. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July. [Downloadable!] (restricted)
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