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Fatal Attraction

  • Bayoumi, Tamim
  • Fazio, Giorgio
  • Kumar, Manmohan
  • MacDonald, Ronald

This Paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice, measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of ‘positive contagion,’ in which capital flows to emerging markets in a herd-like manner largely unrelated to fundamentals. Identifying such periods of ‘fatal attraction’ is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3870.

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Date of creation: Apr 2003
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Handle: RePEc:cpr:ceprdp:3870
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  14. Paolo Pesenti & Cedric Tille, 2000. "The economics of currency crises and contagion: an introduction," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 3-16.
  15. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
  16. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  17. Paul R. Masson, 1998. "Contagion; Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria," IMF Working Papers 98/142, International Monetary Fund.
  18. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers 3310, C.E.P.R. Discussion Papers.
  19. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
  20. Allan Drazen, 1999. "Political Contagion in Currency Crises," NBER Working Papers 7211, National Bureau of Economic Research, Inc.
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