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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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  1. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  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.
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