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On the Measurement of the International Propagation of Shocks

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  • Roberto Rigobon

Abstract

In this paper I offer an alternative identification assumption that allows one to test for changing patterns regarding the international propagation of shocks when endogenous variables, omitted variables, and heteroskedasticity are present in the data. Using this methodology, I demonstrate that the propagation mechanisms of 36 stock markets remained relatively stable throughout the last three major international crises which have been associated with 'contagion' (i.e., Mexico 1994, Hong Kong 1997, and Russia 1998). These findings cast considerable doubt upon theories that suggest that the propagation of shocks is crisis contingent, and driven by endogenous liquidity issues, multiple equilibria, and political contagion. Rather, these findings would seem to support theories that identify such matters as trade, learning, and aggregate shocks as the primary transmission mechanisms in this process.

Suggested Citation

  • Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7354
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. Gerlach, Stefan & Smets, Frank, 1995. "Contagious speculative attacks," European Journal of Political Economy, Elsevier, vol. 11(1), pages 45-63, March.
    3. Robert S. Pindyck & Julio J. Rotemberg, 1993. "The Comovement of Stock Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 1073-1104.
    4. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
    5. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    6. Ray Yeu-Tien Chou & Victor Ng & Lynn K. Pi, 1994. "Cointegration of International Stock Market Indices," IMF Working Papers 94/94, International Monetary Fund.
    7. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini & Cedric Tille, 1999. "Competitive devaluations: a welfare-based approach," Staff Reports 58, Federal Reserve Bank of New York.
    8. Froot, Kenneth A. & O'Connell, Paul G. J. & Seasholes, Mark S., 2001. "The portfolio flows of international investors," Journal of Financial Economics, Elsevier, vol. 59(2), pages 151-193, February.
    9. Pindyck, Robert S & Rotemberg, Julio J, 1990. "The Excess Co-movement of Commodity Prices," Economic Journal, Royal Economic Society, vol. 100(403), pages 1173-1189, December.
    10. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 603-617, August.
    11. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters,in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
    12. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
    13. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
    14. Sebastian Edwards, 1998. "Interest Rate Volatility, Capital Controls, and Contagion," NBER Working Papers 6756, National Bureau of Economic Research, Inc.
    15. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    16. Paul Cashin & Manmohan S. Kumar & C. John McDermott, 1995. "International Integration of Equity Markets and Contagion Effects," IMF Working Papers 95/110, International Monetary Fund.
    17. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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