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Is Contagion in the Eye of the Beholder?

  • Mark Mink

Empirical research on contagion between international stock markets generally focuses on market returns converted to US dollars, as this would be consistent with the perspective of an international investor. This note argues that such a conversion is inappropriate, since only returns denominated in local currencies accurately reflect supply and demand in national stock markets. When these returns are converted to a common currency they are also affected by exchange rate fluctuations, which leads to biased results as is illustrated using an example from the sub-prime crisis.

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File URL: http://www.dnb.nl/binaries/234%20-%20Is%20Contagion%20in%20the%20Eye%20of%20the%20Beholder_tcm46-227925.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 234.

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Date of creation: Dec 2009
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Handle: RePEc:dnb:dnbwpp:234
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