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Measuring Contagion with a Bayesian Time-Varying Coefficient Model

Author

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  • Alessandro Rebucci
  • Matteo Ciccarelli

Abstract

We propose using a Bayesian time-varying coefficient model estimated with Markov chain-Monte Carlo methods to measure contagion empirically. The proposed measure works in the joint presence of heteroskedasticity and omitted variables and does not require knowledge of the timing of the crisis. It distinguishes contagion not only from interdependence but also from structural breaks and can be used to investigate positive as well as negative contagion. The proposed measure appears to work well using both simulated and actual data.

Suggested Citation

  • Alessandro Rebucci & Matteo Ciccarelli, 2003. "Measuring Contagion with a Bayesian Time-Varying Coefficient Model," IMF Working Papers 03/171, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:03/171
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    References listed on IDEAS

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    3. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    4. Canova, Fabio, 1993. "Modelling and forecasting exchange rates with a Bayesian time-varying coefficient model," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 233-261.
    5. Roberto Rigobon, 2002. "Contagion: How to Measure It?," NBER Chapters,in: Preventing Currency Crises in Emerging Markets, pages 269-334 National Bureau of Economic Research, Inc.
    6. Timothy Cogley & Thomas J. Sargent, 2005. "Drift and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 262-302, April.
    7. 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.
    8. Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, vol. 57(1), pages 231-246, June.
    9. Canova, Fabio & Ciccarelli, Matteo, 2004. "Forecasting and turning point predictions in a Bayesian panel VAR model," Journal of Econometrics, Elsevier, vol. 120(2), pages 327-359, June.
    10. Taimur Baig & Ilan Goldfajn, 2000. "The Russian Default and the Contagion to Brazil," IMF Working Papers 00/160, International Monetary Fund.
    11. Chib, Siddhartha & Greenberg, Edward, 1995. "Hierarchical analysis of SUR models with extensions to correlated serial errors and time-varying parameter models," Journal of Econometrics, Elsevier, vol. 68(2), pages 339-360, August.
    12. Matteo Ciccarelli & Alessandro Rebucci, 2001. "The Transmission Mechanism of European Monetary Policy: Is There Heterogeneity? Is It Changing Over Time?," Working Papers 0115, Banco de España;Working Papers Homepage.
    13. Toni Gravelle & Maral Kichian & James Morley, 2003. "Shift Contagion in Asset Markets," Staff Working Papers 03-5, Bank of Canada.
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    Cited by:

    1. Gropp, Reint & Moerman, Gerard, 2004. "Measurement of contagion in banks' equity prices," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 405-459, April.
    2. Juan Francisco Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2005. "Markov-switching structural vector autoregressions: theory and application," FRB Atlanta Working Paper 2005-27, Federal Reserve Bank of Atlanta.
    3. Lorenzo Cappiello & Bruno Gérard & Arjan Kadareja & Simone Manganelli, 2014. "Measuring Comovements by Regression Quantiles," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 12(4), pages 645-678.
    4. Fabio Canova & Matteo Ciccarelli, 2009. "Estimating Multicountry Var Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 929-959, August.
    5. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    6. Canova, Fabio & Ciccarelli, Matteo, 2006. "Estimating multi-country VAR models," Working Paper Series 603, European Central Bank.
    7. Baele, Lieven & Inghelbrecht, Koen, 2010. "Time-varying integration, interdependence and contagion," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 791-818, September.
    8. Simone Manganelli & Lorenzo Cappiello & Bruno Gerard, 2004. "The Contagion Box: Measuring Co-Movements in Financial Markets by Regression Quantiles," Econometric Society 2004 Latin American Meetings 77, Econometric Society.

    More about this item

    Keywords

    International financial markets; contagion; Gibbs sampling; heteroskedasticity; omitted variable bias; time-varying coefficient models; correlation; covariance; parameter vector; correlations; Bayesian Analysis; Simulation Methods; Open Economy Macroeconomics; International Policy Coordination and Transmission;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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