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Looking for Contagion: the Evidence from the ERM

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  • Favero, Carlo A.
  • Giavazzi, Francesco

Abstract

This paper applies a full-information technique to test for the presence of contagion across the money markets of ERM members. We show that whenever it is possible to estimate a model for interdependence, a test for contagion based o a full information technique is more powerful. We test for the presence of contagion after having identified episodes of country-specific shocks, whose effect on other European markets is significantly different from those predictable from the estimated channels of interdependence. Using data on three-month interest rate spreads on German rates for seven countries over the period 1988–1992, we are unable to reject the null of contagion. Our evidence suggests that contagion within the ERM was a general phenomenon not limited to a subset of weaker countries, the exception in our sample being France. Our result are mute as to the question of what lies behind these episodes of contagion; they show, however, that it is not always that one only detects contagion when one applies poor statistical techniques.

Suggested Citation

  • Favero, Carlo A. & Giavazzi, Francesco, 2000. "Looking for Contagion: the Evidence from the ERM," CEPR Discussion Papers 2591, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2591
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    Cited by:

    1. Buch, Claudia M., 2001. "Cross-Border Banking and Transmission Mechanisms: The Case of Europe," Kiel Working Papers 1063, Kiel Institute for the World Economy (IfW Kiel).
    2. Caporale, Guglielmo Maria & Cipollini, Andrea & Spagnolo, Nicola, 2005. "Testing for contagion: a conditional correlation analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 476-489, June.
    3. Essahbi Essaadi & Jamel Jouini & Wajih Khallouli, 2009. "The Asian Crisis Contagion: A Dynamic Correlation Approach Analysis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 241-260, June.
    4. Sander, Harald & Kleimeier, Stefanie, 2003. "Contagion and causality: an empirical investigation of four Asian crisis episodes," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 171-186, April.
    5. Radovan Vadovic, 2009. "Early, Late, and Multiple Bidding in Internet Auctions," Working Papers 0904, Centro de Investigacion Economica, ITAM.
    6. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    7. Fazio, Giorgio, 2007. "Extreme interdependence and extreme contagion between emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(8), pages 1261-1291, December.
    8. Coudert, Virginie & Couharde, Cécile & Mignon, Valérie, 2011. "Exchange rate volatility across financial crises," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3010-3018, November.
    9. filippo gori, 2012. "The risk of self-protection: the role of bank bailout guarantees in channelling sovereign credit risk internationally," IHEID Working Papers 12-2014, Economics Section, The Graduate Institute of International Studies, revised 30 Nov 2014.
    10. Toni Gravelle & Maral Kichian & James Morley, 2003. "Shift Contagion in Asset Markets," Staff Working Papers 03-5, Bank of Canada.
    11. Mr. Mardi Dungey & Ms. Renee Fry & Mr. Vance Martin & Ms. Brenda Gonzalez-Hermosillo, 2002. "International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse," IMF Working Papers 2002/074, International Monetary Fund.
    12. Osama M Badr & Wajih Khallouli, 2019. "Testing for Shift-Contagion Vulnerability Among MENA Stock Markets During the Turkish Financial Crisis," Applied Economics and Finance, Redfame publishing, vol. 6(1), pages 53-63, January.
    13. Margarida Abreu, 2003. "Contagion Phenomena in Financial Crises: Evidence from the Portuguese and Spanish Exchange Rate Crises in the Early Nineties," Working Papers Department of Economics 2003/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    14. Sergio L. Schmukler, 2004. "Financial globalization: gain and pain for developing countries," Economic Review, Federal Reserve Bank of Atlanta, vol. 89(Q 2), pages 39-66.
    15. Wajih Khallouli, 2008. "Shift-Contagion in Middle East and North Africa Stock Markets," Working Papers 420, Economic Research Forum, revised 06 Jan 2008.

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    More about this item

    Keywords

    Contagion; ERM; Interdependence;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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