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Testing For Contagion: A Conditional Correlation Analysis

  • gulielmo maria caporale

    (south bank university)

  • rea cipollini

    (queen mary university of london)

  • nicola spagnolo

    (brunel univesity)

In this paper we test for contagion within the East Asian region, contagion being defined as a significant increase in the degree of co- movement between stock returns in different countries. For this purpose we use a parameter stability test and, following Rigobon (2004), we control for three types of bias, resulting from heteroscedasticity, endogeneity and omitted variable respectively. The null of interdependence against the alternative of contagion is then tested as an over-identifying restriction. Unlike other studies, our approach is based on full-sample estimation, and hence avoids the power problems arising from the typical situation of a large “non-crisis” and a small “crisis” sample. We also select endogenously the breakpoints corresponding to the beginning of the contagion period, and finally we impose more plausible restrictions in order to identify the system. Our findings suggest the existence of contagion within the East Asian region, consistently with crisis-contingent theories of asset market linkages.

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Paper provided by EconWPA in its series International Finance with number 0406003.

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Length: 18 pages
Date of creation: 11 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpif:0406003
Note: Type of Document - pdf; pages: 18
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
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  4. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
  5. repec:cup:etheor:v:13:y:1997:i:3:p:315-52 is not listed on IDEAS
  6. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
  7. Sentana, E. & Fiorentini, G., 1997. "Identification, Estimation and Testing of Conditionally Heteroskedastic Factor Model," Papers 9709, Centro de Estudios Monetarios Y Financieros-.
  8. Carlo A. Favero & Francesco Giavazzi, 2000. "Looking for Contagion: Evidence from the ERM," NBER Working Papers 7797, National Bureau of Economic Research, Inc.
  9. Kaminsky, Graciela L. & Schmukler, Sergio L., 1999. "What triggers market jitters?: A chronicle of the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 537-560, August.
  10. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate," NBER Working Papers 6834, National Bureau of Economic Research, Inc.
  11. 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.
  12. Giancarlo Corsetti & Marcello Pericoli & Massimo Sbracia, 2001. "Correlation Analysis of Financial Contagion: What One Should Know Before Running a Test," Working Papers 822, Economic Growth Center, Yale University.
  13. Rigobon, Roberto, 2003. "On the measurement of the international propagation of shocks: is the transmission stable?," Journal of International Economics, Elsevier, vol. 61(2), pages 261-283, December.
  14. Roberto Rigobón & Kristin Forbes, 2001. "Contagion in Latin America: Definitions, Measurement, and Policy Implications," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 1-46, January.
  15. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July.
  16. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction of Monetary Policy to the Stock Market," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 639-669.
  17. Favero, Carlo A. & Giavazzi, Francesco, 2000. "Looking for Contagion: the Evidence from the ERM," CEPR Discussion Papers 2591, C.E.P.R. Discussion Papers.
  18. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
  19. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
  20. Mardi Dungey & Diana Zhumabekova, 2001. "Testing for contagion using correlations: some words of caution," Pacific Basin Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
  21. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
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