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Financial contagion and tests using instrumental variables

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  • Andreas Pick

Abstract

This paper considers empirical tests for the contagion of financial crises that address the endogeneity of contagion by using instrumental variable estimation techniques. Two complications in the application to contagion are that the regression model is potentially incoherent and that it contains a parameter that is not identified under the null of no contagion. Monte Carlo experiments suggest that their influence is small in practice with the notable exception of similar tests, where both size and power are affected. An application to stock market data for the UK, USA, and Japan shows that ignoring the endogeneity of contagion leads to highly significant contagion coefficients. However, tests for contagion that takes the endogeneity into account result in mixed evidence for financial contagion.

Suggested Citation

  • Andreas Pick, 2007. "Financial contagion and tests using instrumental variables," DNB Working Papers 139, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:139
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    File URL: https://www.dnb.nl/binaries/Working%20Paper%20139-2007_tcm46-156155.pdf
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    References listed on IDEAS

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    1. Pesaran, M. Hashem & Pick, Andreas, 2007. "Econometric issues in the analysis of contagion," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1245-1277, April.
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    Cited by:

    1. Ludwig, Alexander, 2014. "A unified approach to investigate pure and wake-up-call contagion: Evidence from the Eurozone's first financial crisis," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 125-146.
    2. Metiu Norbert, 2011. "Financial contagion in developed sovereign bond markets," Research Memorandum 004, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

    More about this item

    Keywords

    Financial crises; contagion; non-linear simultaneous equation models;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G3 - Financial Economics - - Corporate Finance and Governance

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