IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Identification and Estimation in an Incoherent Model of Contagion

  • Massacci, D.
Registered author(s):

    This paper deals with the issues of identification and estimation in the canonical model of contagion advanced in Pesaran and Pick (2007). The model is a two-equation nonlinear simultaneous equations system with endogenous dummy variables; it also represents an extension of univariate threshold autoregressive (TAR) models to a simultaneous equations framework. For a range of economic fundamentals, the model produces multiple (i.e. two) equilibria, and the choice of the equilibrium is modelled as being driven by a Bernoulli process; further, the presence of multiple equilibria leads to an incoherent econometric specification. The coherency issue is then reflected in the analytical expression for the likelihood function derived in the paper. It is proved that neither identification nor Full Information Maximum Likelihood (FIML) estimation of the model require knowledge of the Bernoulli process driving the solution choice in the multiple equilibria region. Monte Carlo experiments show that the FIML estimator performs better than the GIVE estimators proposed in Pesaran and Pick (2007). Finally, an empirical illustration based on stock market returns is provided.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0744.pdf
    File Function: Working Paper Version
    Download Restriction: no

    Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0744.

    as
    in new window

    Length: 24
    Date of creation: Aug 2007
    Date of revision:
    Handle: RePEc:cam:camdae:0744
    Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Jeanne, Olivier & Masson, Paul R, 1998. "Currency Crises, Sunspots and Markov-Switching Regimes," CEPR Discussion Papers 1990, C.E.P.R. Discussion Papers.
    2. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005. "'Some contagion, some interdependence': More pitfalls in tests of financial contagion," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1177-1199, December.
    3. Pesaran, M Hashem & Timmermann, Allan, 1992. "A Simple Nonparametric Test of Predictive Performance," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 561-65, October.
    4. Mardi Dungey & Renee Fry & Vance Martin & Brenda Gonzalez-Hermosillo, 2004. "Empirical Modeling of Contagion; A Review of Methodologies," IMF Working Papers 04/78, International Monetary Fund.
    5. M. Hashem Pesaran & Andreas Pick, 2004. "Econometric Issues in the Analysis of Contagion," CESifo Working Paper Series 1176, CESifo Group Munich.
    6. Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, vol. 57(1), pages 231-246, June.
    7. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    8. Newey, Whitney K, 1990. "Efficient Instrumental Variables Estimation of Nonlinear Models," Econometrica, Econometric Society, vol. 58(4), pages 809-37, July.
    9. Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October.
    10. Marcel Fratzscher, 2003. "On currency crises and contagion," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(2), pages 109-129.
    11. Kee-Hong Bae & G. Andrew Karolyi & Rene M. Stulz, 2001. "A new approach to measuring financial contagion," Proceedings 743, Federal Reserve Bank of Chicago.
    12. Blundell, Richard & Smith, Richard J., 1994. "Coherency and estimation in simultaneous models with censored or qualitative dependent variables," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 355-373.
    13. Martens, Martin & Poon, Ser-Huang, 2001. "Returns synchronization and daily correlation dynamics between international stock markets," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1805-1827, October.
    14. W. R. M. Perraudin & Manmohan S. Kumar & Uma Moorthy, 2002. "Predicting Emerging Market Currency Crashes," IMF Working Papers 02/7, International Monetary Fund.
    15. Melvyn Weeks & Mark R. Stone, 2001. "Systemic Financial Crises, Balance Sheets, and Model Uncertainity," IMF Working Papers 01/162, International Monetary Fund.
    16. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
    17. Amemiya, Takeshi, 1977. "The Maximum Likelihood and the Nonlinear Three-Stage Least Squares Estimator in the General Nonlinear Simultaneous Equation Model," Econometrica, Econometric Society, vol. 45(4), pages 955-68, May.
    18. Blackburn, Keith & Sola, Martin, 1993. " Speculative Currency Attacks and Balance of Payments Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 7(2), pages 119-44, June.
    19. Roberto Rigobon, 2001. "Contagion: How to Measure It?," NBER Working Papers 8118, National Bureau of Economic Research, Inc.
    20. Kooreman, Peter, 1994. "Estimation of Econometric Models of Some Discrete Games," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(3), pages 255-68, July-Sept.
    21. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
    22. Marcello Pericoli & Massimo Sbracia, 2001. "A Primer on Financial Contagion," Temi di discussione (Economic working papers) 407, Bank of Italy, Economic Research and International Relations Area.
    23. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
    24. Arthur Lewbel, 1997. "Coherence and Completeness of Structural Models Containing a Dummy Endogenous Variable," Boston College Working Papers in Economics 456, Boston College Department of Economics, revised 04 Sep 2006.
    25. James J. Heckman, 1977. "Dummy Endogenous Variables in a Simultaneous Equation System," NBER Working Papers 0177, National Bureau of Economic Research, Inc.
    26. Donald W.K. Andrews & James H. Stock, 2005. "Inference with Weak Instruments," Cowles Foundation Discussion Papers 1530, Cowles Foundation for Research in Economics, Yale University.
    27. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
    28. Miller, Merton, 1998. "Asian financial crisis," Japan and the World Economy, Elsevier, vol. 10(3), pages 355-358, July.
    29. Elie Tamer, 2003. "Incomplete Simultaneous Discrete Response Model with Multiple Equilibria," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 147-165.
    30. Rigobon, Roberto, 2003. "On the measurement of the international propagation of shocks: is the transmission stable?," Journal of International Economics, Elsevier, vol. 61(2), pages 261-283, December.
    31. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
    32. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    33. Billio, Monica & Pelizzon, Loriana, 2003. "Contagion and interdependence in stock markets: Have they been misdiagnosed?," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 405-426.
    34. Graciela L. Kaminsky & Carmen Reinhart, 2003. "The Center and the Periphery: The Globalization of Financial Turmoil," NBER Working Papers 9479, National Bureau of Economic Research, Inc.
    35. Paul R. Masson, 1998. "Contagion; Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria," IMF Working Papers 98/142, International Monetary Fund.
    36. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    37. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
    38. Gourieroux, C & Laffont, J J & Monfort, A, 1980. "Coherency Conditions in Simultaneous Linear Equation Models with Endogenous Switching Regimes," Econometrica, Econometric Society, vol. 48(3), pages 675-95, April.
    39. Kruger, Mark & Osakwe, Patrick N. & Page, Jennifer, 1998. "Fundamentals, Contagion and Currency Crises: An Empirical Analysis," Staff Working Papers 98-10, Bank of Canada.
    40. Rangvid, Jesper, 2001. " Second Generation Models of Currency Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 613-46, December.
    41. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
    42. Timothy F. Bresnahan & Peter C. Reiss, 1990. "Entry in Monopoly Market," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 531-553.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cam:camdae:0744. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jake Dyer)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.