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Looking for Contagion: Evidence from the ERM

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  • Carlo A. Favero
  • Francesco Giavazzi

Abstract

This paper applies a full-information technique to test for the presence of contagion across the money markets of ERM member countries. We show that whenever it is possible to estimate a model for interdependence, a test for contagion based on a full information technique is more powerful. We test for the presence of contagion after having identified episodes of country-specific shocks, whose effects on other European markets are significantly different from those predictable from the estimated channels of interdependence. Using data on three-months interest rate spreads on German rates for seven countries over the period 1988-1992, we are unable to reject the null of contagion. Our evidence suggest that contagion within the ERM was a general phenomenon, not limited to a subset of weaker countries, the exception in the sample being France. Our results are mute as to the question of what lies behind these episodes of contagion; they show, however, that it is not always true that one only detects contagion when one applies poor statistical techniques.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7797.

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Date of creation: Jul 2000
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Handle: RePEc:nbr:nberwo:7797

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  1. Buiter, W.H. & Corsetti, G.M. & Pesenti, P.A., 1998. "Interpreting the ERM Crisis: Country-Specific and Systemic Issues," Princeton Studies in International Economics, International Economics Section, Departement of Economics Princeton University, 84, International Economics Section, Departement of Economics Princeton University,.
  2. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão, Department of Economics PUC-Rio (Brazil) 400, Department of Economics PUC-Rio (Brazil).
  3. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  4. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 113-44, January.
  5. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
  6. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1251-71, November.
  7. Johansen, S., 1999. "A Bartlett Correction Factor for Tests on the Cointegrating Relations," Economics Working Papers, European University Institute eco99/10, European University Institute.
  8. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774501, October.
  9. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
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Cited by:
  1. Fazio, Giorgio, 2007. "Extreme interdependence and extreme contagion between emerging markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(8), pages 1261-1291, December.
  2. Essahbi Essaadi & Jamel Jouini & Wajih Khallouli, 2009. "The Asian Crisis Contagion: A Dynamic Correlation Approach Analysis," Post-Print, HAL halshs-00404386, HAL.
  3. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, Elsevier, vol. 89(2), pages 317-330.
  4. Coudert, Virginie & Couharde, Cécile & Mignon, Valérie, 2011. "Exchange rate volatility across financial crises," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(11), pages 3010-3018, November.
  5. Margarida Abreu, 2003. "Contagion Phenomena in Financial Crises: Evidence from the Portuguese and Spanish Exchange Rate Crises in the Early Nineties," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2003/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  6. Radovan Vadovic, 2009. "Early, Late, and Multiple Bidding in Internet Auctions," Working Papers, Centro de Investigacion Economica, ITAM 0904, Centro de Investigacion Economica, ITAM.
  7. gulielmo maria caporale & rea cipollini & nicola spagnolo, 2004. "Testing For Contagion: A Conditional Correlation Analysis," International Finance, EconWPA 0406003, EconWPA.
  8. Caporale, Guglielmo Maria & Cipollini, Andrea & Spagnolo, Nicola, 2005. "Testing for contagion: a conditional correlation analysis," Journal of Empirical Finance, Elsevier, Elsevier, vol. 12(3), pages 476-489, June.
  9. Sander, Harald & Kleimeier, Stefanie, 2003. "Contagion and causality: an empirical investigation of four Asian crisis episodes," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 13(2), pages 171-186, April.
  10. Sergio L. Schmukler, 2004. "Financial globalization: gain and pain for developing countries," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q 2, pages 39 - 66.
  11. Claudia M. Buch, 2001. "Cross-Border Banking and Transmission Mechanisms: The Case of Europe," Kiel Working Papers 1063, Kiel Institute for the World Economy.
  12. Toni Gravelle & Maral Kichian & James Morley, 2003. "Shift Contagion in Asset Markets," Working Papers, Bank of Canada 03-5, Bank of Canada.
  13. Renee Fry & Vance Martin & Brenda González-Hermosillo & Mardi Dungey, 2002. "International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse," IMF Working Papers, International Monetary Fund 02/74, International Monetary Fund.

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