Contagion: How to Measure It?
AbstractThe 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8118.
Date of creation: Feb 2001
Date of revision:
Publication status: published as Roberto Rigobon. "Contagion: How to Measure It?," in Sebastian Edwards and Jeffrey A. Frankel, editors, "Preventing Currency Crises in Emerging Markets" University of Chicago Press (2002)
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-02-14 (All new papers)
- NEP-ECM-2001-02-14 (Econometrics)
- NEP-FMK-2001-02-14 (Financial Markets)
- NEP-IFN-2001-02-14 (International Finance)
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