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Contagion: How to Measure It?

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  • Roberto Rigobon

Abstract

The empirical literature on contagion has mainly measured the propagation of shocks across countries using daily stock markets, interest rates, and exchange rates. Several methodologies have been used for this purpose, however, the properties of the data introduces important limitations on the implementation of these procedures, as well as on the interpretation of the results. This paper, has three objectives: First, it evaluates some of the techniques that have been used frequently to measure contagion. The paper argues that if the data suffers from heteroskedasticity (conditional or not), omitted variables and simultaneous equation problems, the conclusions drawn from most of the procedures could be biased. Second, the paper summarizes two new procedures that have been developed to cope with these problems. One methodology is aimed to test for the stability of parameters, while the other one estimates consistently the contemporaneous relationship across countries. Finally, the paper estimates (consistently) the contemporaneous transmission mechanism between emerging stock markets, and bond markets. Furthermore, it is found that regional variables, as well as trade linkages, constitute a sizeable explanation of the strength of the propagation of shocks across bond markets, but not as important in stock markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8118.

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Date of creation: Feb 2001
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Publication status: published as Contagion: How to Measure It? , Roberto Rigobon. in Preventing Currency Crises in Emerging Markets , Edwards and Frankel. 2002
Handle: RePEc:nbr:nberwo:8118

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  1. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
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  8. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, Elsevier, vol. 102(2), pages 143-164, June.
  9. Horowitz, Joel L, 1992. "A Smoothed Maximum Score Estimator for the Binary Response Model," Econometrica, Econometric Society, Econometric Society, vol. 60(3), pages 505-31, May.
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  13. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
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  16. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(4), pages 603-617, August.
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  18. Manski, Charles F., 1985. "Semiparametric analysis of discrete response : Asymptotic properties of the maximum score estimator," Journal of Econometrics, Elsevier, Elsevier, vol. 27(3), pages 313-333, March.
  19. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
  20. 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.
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