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Bad Bad Contagion

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  • Londono, Juan M.

Abstract

Bad contagion, the downside component of contagion in international stock markets, has negative implications for financial stability. I propose a measure for the occurrence and severity of global contagion that combines the factor-model approach in Bekaert et al. (2005) with the model-free or co-exceedance approach in Bae et al. (2003). Contagion is measured as the proportion of international stock markets that simultaneously experience unexpected returns beyond a certain threshold. I decompose contagion into its downside or bad component (the co-exceedance of low returns) and its upside or good component (the co-exceedance of high returns). I find that episodes of bad contagion are followed by a significant drop in country-level stock index prices and by a deterioration of financial stability indicators, especially for more open economies.

Suggested Citation

  • Londono, Juan M., 2016. "Bad Bad Contagion," International Finance Discussion Papers 1178, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1178
    DOI: 10.17016/IFDP.2016.1178
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    File URL: http://www.federalreserve.gov/econresdata/ifdp/2016/files/ifdp1178.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    International stock markets ; Bad contagion ; Downside contagion ; Inter-connectedness ; International integration ; Financial stability ; SRISK;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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