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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. Taimur Baig & Ilan Goldfajn, 2000. "The Russian Default and the Contagion to Brazil," IMF Working Papers 00/160, International Monetary Fund.
  2. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  3. Powell, James L, 1986. "Symmetrically Trimmed Least Squares Estimation for Tobit Models," Econometrica, Econometric Society, Econometric Society, vol. 54(6), pages 1435-60, November.
  4. G. Andrew Karoly & Rene Stulz, . "Why do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Research in Financial Economics 9603, Ohio State University.
  5. Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany.
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  8. Gabriele Fiorentini & Enrique Sentana Iváñez, 1997. "Identification, estimation and testing of conditionally heteroskedastic factor models," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 1997-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  9. Ratna Sahay & Gaston Gelos, 2000. "Financial Market Spillovers in Transition Economies," IMF Working Papers 00/71, International Monetary Fund.
  10. Honore, Bo E. & Kyriazidou, Ekaterini & Udry, Christopher, 1997. "Estimation of Type 3 Tobit models using symmetric trimming and pairwise comparisons," Journal of Econometrics, Elsevier, Elsevier, vol. 76(1-2), pages 107-128.
  11. Reuven Glick & Andrew K. Rose, 1998. "Contagion and trade: why are currency crises regional?," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 98-03, Federal Reserve Bank of San Francisco.
  12. 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.
  13. Horowitz, Joel L., 1993. "Semiparametric estimation of a work-trip mode choice model," Journal of Econometrics, Elsevier, Elsevier, vol. 58(1-2), pages 49-70, July.
  14. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
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  16. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
  17. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  18. Kristin J. Forbes, 1999. "How are shocks propagated internationally? Firm-level evidence from the Russian and East Asian crises," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Sep.
  19. Mervyn A. King & Sushil Wadhwani, 1989. "Transmission of Volatility Between Stock Markets," NBER Working Papers 2910, National Bureau of Economic Research, Inc.
  20. Guillermo A. Calvo & Enrique G. Mendoza, 1999. "Regional Contagion and the Globalization of Securities Markets," NBER Working Papers 7153, National Bureau of Economic Research, Inc.
  21. 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.
  22. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
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