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Are Financial Crises Becoming Increasingly More Contagious? What is the Historical Evidence on Contagion?

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  • Michael D. Bordo
  • Antu P. Murshid

Abstract

We examine the evidence of contagion during the pre World War I era and the interwar and contrast our findings with the evidence of contagion from the recent crises in Asia and Latin America. Using weekly data on bond prices and interest rates, we investigate the extent to which bilateral cross-market correlations rise following the onset of a crisis. After correcting for heteroscedasticity, ala Forbes and Rigobon (1998, 1999), we find little evidence of significant increases in cross-market correlations in either the earlier regimes or in the more recent period. We use principle components analysis to assess the extent of comovement across all markets as well as within various groups of markets, prior to, and after the onset of a crisis. Countries are grouped into regions, as well as along the lines of advanced and emerging. There is little evidence to suggest that cross-country linkages are tighter in the aftermath of a financial crisis for the recent period. There is, however, some evidence of stronger comovement during periods of instability in earlier regimes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7900.

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Date of creation: Sep 2000
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Publication status: published as Claessens, Stijn and Kristin I. Forbes (eds.) International Financial Contagion. Boston, MA: Kluwer Academic Publishers, 2001.
Handle: RePEc:nbr:nberwo:7900

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  1. Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
  2. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
  3. Neal,Larry, 1994. "The Rise of Financial Capitalism," Cambridge Books, Cambridge University Press, number 9780521457385, October.
  4. Taimur Baig & Ilan Goldfajn, 1998. "Financial Market Contagion in the Asian Crisis," IMF Working Papers 98/155, International Monetary Fund.
  5. Michael Bordo & Barry Eichengreen, 1999. "Is our Current International Economic Environment Unusually Crisis Prone?," RBA Annual Conference Volume, in: David Gruen & Luke Gower (ed.), Capital Flows and the International Financial System Reserve Bank of Australia.
  6. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
  7. Oskar Morgenstern, 1959. "International Financial Transactions and Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number morg59-1.
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