Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion
AbstractThis Paper develops a test of contagion in financial markets based on bivariate correlation analysis, which generalizes existing tests, and applies it to the international effects of the Hong Kong stock market crisis of October 1997. Contagion is defined as a structural break in the international transmission of financial shocks. For plausible values of the variance of country-specific shocks in Hong Kong, our test finds evidence of contagion for 5 countries out of a sample of 17. This is in sharp contrast with the findings of recent literature, according to which there is 'no contagion, only interdependence'. We show that this strong result in the literature is due to arbitrary and unrealistic restrictions on the variance of country-specific shocks.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3310.
Date of creation: Apr 2002
Date of revision:
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Other versions of this item:
- Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005. "'Some contagion, some interdependence': More pitfalls in tests of financial contagion," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1177-1199, December.
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- F30 - International Economics - - International Finance - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-18 (All new papers)
- NEP-FMK-2003-02-18 (Financial Markets)
- NEP-IFN-2003-02-18 (International Finance)
- NEP-RMG-2003-02-18 (Risk Management)
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