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Market Integration and Contagion

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  • Geert Bekaert
  • Campbell R. Harvey

Abstract

Contagion is usually defined as correlation between markets in excess of what would be implied by economic fundamentals; however, there is considerable disagreement regarding the definitions of the fundamentals, how the fundamentals might differ across countries, and the mechanisms that link the fundamentals to asset returns. Our research takes, as a starting point, a two-factor model with time-varying betas that accommodates various degrees of market integration between different markets. We apply this model to stock returns in three different regions: Europe, South-East Asia, and Latin America. In addition to providing new insights on contagion during crisis periods, we document patterns through time in world and regional market integration and measure the proportion of volatility driven by global, regional, and local factors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9510.

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Date of creation: Feb 2003
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Publication status: published as Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
Handle: RePEc:nbr:nberwo:9510

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