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Fatal Attraction

Author

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

Abstract

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.

Suggested Citation

  • MacDonald, Ronald & Bayoumi, Tamim & Kumar, Manmohan & Fazio, Giorgio, 2003. "Fatal Attraction," CEPR Discussion Papers 3870, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3870
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    References listed on IDEAS

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    Cited by:

    1. Eswar S. Prasad & Kenneth Rogoff & Shang-Jin Wei & M. Ayhan Kose, 2007. "Financial Globalization, Growth and Volatility in Developing Countries," NBER Chapters, in: Globalization and Poverty, pages 457-516, National Bureau of Economic Research, Inc.
    2. Nagayasu, Jun, 2010. "Economic Factors Contributing to Time-Varying Conditional Correlations in Stock Returns," MPRA Paper 28391, University Library of Munich, Germany.
    3. Terhi Jokipii & Brian Lucey, 2005. "CEE Banking Sector Co-Movement: Contagion or Interdependence?," The Institute for International Integration Studies Discussion Paper Series iiisdp077, IIIS.
    4. Ms. Katrin Elborgh-Woytek, 2003. "Of Openess and Distance: Trade Developments in the Commonwealth of Independent States, 1993-2002," IMF Working Papers 2003/207, International Monetary Fund.
    5. Sensoy, Ahmet, 2013. "Dynamic relationship between precious metals," Resources Policy, Elsevier, vol. 38(4), pages 504-511.

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    More about this item

    Keywords

    Contagion; Capital inflows; Emerging market crises;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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