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Fatal Attraction; A New Measure of Contagion

Author

Listed:
  • Tamim Bayoumi
  • Manmohan S. Kumar
  • Giorgio Fazio
  • Ronald MacDonald

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 it 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

  • Tamim Bayoumi & Manmohan S. Kumar & Giorgio Fazio & Ronald MacDonald, 2003. "Fatal Attraction; A New Measure of Contagion," IMF Working Papers 03/80, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:03/80
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Baek, In-Mee, 2006. "Portfolio investment flows to Asia and Latin America: Pull, push or market sentiment?," Journal of Asian Economics, Elsevier, vol. 17(2), pages 363-373, April.
    2. Mardi Dungey & Renee Fry & Brenda Gonzalez-Hermosillo & Vance Martin, 2005. "Empirical modelling of contagion: a review of methodologies," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 9-24.
    3. MAVEYRAUD Samuel, 2015. "The international contagion of short-run interest rates during the Great Depression," Cahiers du GREThA (2007-2019) 2015-11, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    4. Dudek, Jérémy, 2013. "Illiquidité, contagion et risque systémique," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/13236 edited by Le Fol, Gaëlle.
    5. Gonzalez-Hermosillo Gonzalez, B.M., 2008. "Transmission of shocks across global financial markets : The role of contagion and investors' risk appetite," Other publications TiSEM d684f3c7-7ad8-4e93-88cf-a, Tilburg University, School of Economics and Management.
    6. Wong, Alfred Y-T. & Fong, Tom Pak Wing, 2011. "Analysing interconnectivity among economies," Emerging Markets Review, Elsevier, vol. 12(4), pages 432-442.
    7. Bertrand Candelon, 2010. "Introduction To The Special Issue Of Pacific Economic Review On Contagion," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 336-339, August.
    8. Antonio Díez de los Ríos & Alicia García Herrero, 2003. "Contagion and portfolio shift in emerging countries' sovereign bonds," Working Papers 0317, Banco de España;Working Papers Homepage.
    9. Bodart, Vincent & Candelon, Bertrand, 2009. "Evidence of interdependence and contagion using a frequency domain framework," Emerging Markets Review, Elsevier, vol. 10(2), pages 140-150, June.
    10. Gębka, Bartosz & Wohar, Mark E., 2013. "International herding: Does it differ across sectors?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 55-84.

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