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Contagion or Interdependence in the recent Global Financial Crisis? An application to the stock markets using unconditional cross-market correlations

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  • Urbina, Jilber

Abstract

We consider stock market contagion as a significant increase in cross-market linkages after a shock to one country or group of countries. Under this definition we study if contagion occurred from the U.S. Financial Crisis to the rest of the major stock markets in the world by using the adjusted (unconditional) correlation coefficient approach (Forbes and Rigobon, 2002) which consists of testing if average crossmarket correlations increase significantly during the relevant period of turmoil. We would not reject the null hypothesis of interdependence in favour of contagion if the increase in correlation only suggests a continuation of high linkages in all state of the world. Moreover, if contagion occurs, this would justify the intervention of the IMF and the suddenly portfolio restructuring during the period under study.

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File URL: http://hdl.handle.net/2072/211884
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Bibliographic Info

Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/211884.

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Date of creation: 2013
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Handle: RePEc:urv:wpaper:2072/211884

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Keywords: Borsa de valors; Crisi financera global; 2007-2009; 339 - Comerç. Relacions econòmiques internacionals. Economia mundial. Màrqueting;

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  1. Ray Yeu-Tien Chou & Victor Ng & Lynn K. Pi, 1994. "Cointegration of International Stock Market Indices," IMF Working Papers 94/94, International Monetary Fund.
  2. Taimur Baig & Ilan Goldfajn, 1998. "Financial Market Contagion in the Asian Crisis," IMF Working Papers 98/155, International Monetary Fund.
  3. Reinhart, Carmen & Kaminsky, Graciela, 1998. "Financial crises in Asia and Latin America: Then and now," MPRA Paper 13877, University Library of Munich, Germany.
  4. Mardi Dungey & Renee Fry & Brenda Gonzalez-Hermosillo & Vance Martin, 2005. "Empirical modelling of contagion: a review of methodologies," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 5(1), pages 9-24.
  5. Roberto Rigobon, 2002. "Contagion: How to Measure It?," NBER Chapters, National Bureau of Economic Research, Inc, in: Preventing Currency Crises in Emerging Markets, pages 269-334 National Bureau of Economic Research, Inc.
  6. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
  7. Mardi Dungey & Diana Zhumabekova, 2001. "Testing for contagion using correlations: some words of caution," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 2001-09, Federal Reserve Bank of San Francisco.
  8. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
  9. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(2), pages 177-97, August.
  10. Giancarlo Corsetti & Marcello Pericoli & Massimo Sbracia, 2001. "Correlation Analysis of Financial Contagion: What One Should Know Before Running a Test," Working Papers, Economic Growth Center, Yale University 822, Economic Growth Center, Yale University.
  11. Hashem Pesaran & Andreas Pick, 2004. "Econometric Issues in the Analysis of Contagion," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 67, Money Macro and Finance Research Group.
  12. Giancarlo Corsetti & Marcello Pericoli & Massimo Sbracia, 2001. "Correlation Analysis of Financial Contagion: What One Should Know before Running a Test," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 408, Bank of Italy, Economic Research and International Relations Area.
  13. Ehud I. Ronn & Akin Sayrak & Stathis Tompaidis, 2009. "The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 44(3), pages 405-436, 08.
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