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Fatal attraction: Using distance to measure contagion in good times as well as bad

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  • Tamim Bayoumi
  • Giorgio Fazio
  • Manmohan Kumar
  • 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 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 & Giorgio Fazio & Manmohan Kumar & Ronald MacDonald, 2007. "Fatal attraction: Using distance to measure contagion in good times as well as bad," Review of Financial Economics, John Wiley & Sons, vol. 16(3), pages 259-273.
    • Handle: RePEc:wly:revfec:v:16:y:2007:i:3:p:259-273
    DOI: 10.1016/j.rfe.2007.01.001
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    3. BAUWENS, Luc & otranto, EDOARDO, 2013. "Modeling the dependence of conditional correlations on volatility," LIDAM Discussion Papers CORE 2013014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Nagayasu, Jun, 2015. "Global and country-specific factors in real effective exchange rates," MPRA Paper 64217, University Library of Munich, Germany.
    5. Burdekin, Richard C.K. & Siklos, Pierre L., 2012. "Enter the dragon: Interactions between Chinese, US and Asia-Pacific equity markets, 1995–2010," Pacific-Basin Finance Journal, Elsevier, vol. 20(3), pages 521-541.
    6. Mobeen Ur Rehman, 2016. "Financial Contagion in EFA Markets in Crisis Periods: A Multivariate GARCH Dynamic Conditional Correlation Framework," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 21(2), pages 121-151, July-Dec.
    7. Sensoy, Ahmet & Eraslan, Veysel & Erturk, Mutahhar, 2016. "Do sovereign rating announcements have an impact on regional stock market co-movements? The case of Central and Eastern Europe," Economic Systems, Elsevier, vol. 40(4), pages 552-567.
    8. Nagayasu, Jun, 2016. "Commonality and Heterogeneity in Real Effective Exchange Rates: Evidence from Advanced and Developing Countries," MPRA Paper 70078, University Library of Munich, Germany.
    9. Eswar S. Prasad & Kenneth Rogoff & Shang-Jin Wei & M. Ayhan Kose, 2007. "Financial Globalization, Growth and Volatility in Developing Countries," NBER Chapters, in: Globalization and Poverty, pages 457-516, National Bureau of Economic Research, Inc.
    10. Avishek Bhandari, 2020. "A wavelet analysis of inter-dependence, contagion and long memory among global equity markets," Papers 2003.14110, arXiv.org.
    11. Cipollini, Fabrizio & Giannozzi, Alessandro & Menchetti, Fiammetta & Roggi, Oliviero, 2020. "The beauty contest between systemic and systematic risk measures: Assessing the empirical performance," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 316-332.
    12. Fernández-Avilés, Gema & Montero, Jose-María & Orlov, Alexei G., 2012. "Spatial modeling of stock market comovements," Finance Research Letters, Elsevier, vol. 9(4), pages 202-212.
    13. Fazio, Giorgio, 2007. "Extreme interdependence and extreme contagion between emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(8), pages 1261-1291, December.
    14. Jean Coulom & Vijay Shenai, 2018. "The Effect of Alternative Measures of Distance on the Correlation of Real Effective Exchange Rate Returns: An Approach to Contagion Analysis," IJFS, MDPI, vol. 6(4), pages 1-18, October.
    15. Abdullahi , Shafiu Ibrahim, 2021. "Islamic equities and COVID-19 pandemic: measuring Islamic stock indices correlation and volatility in period of crisis," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 29, pages 50-66.
    16. Rémy Lecat & Dorothée Pasquier de Franclieu, 2024. "Convergence and Capital Flows in Europe: The Role of Financial Intermediation and Investor Quality," De Economist, Springer, vol. 172(2), pages 101-119, June.
    17. Berger, Dave & Turtle, H.J., 2011. "Emerging market crises and US equity market returns," Global Finance Journal, Elsevier, vol. 22(1), pages 32-41.
    18. Baur, Dirk G. & Fry, Renée A., 2009. "Multivariate contagion and interdependence," Journal of Asian Economics, Elsevier, vol. 20(4), pages 353-366, September.
    19. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
    20. Kang, Sang Hoon & Uddin, Gazi Salah & Troster, Victor & Yoon, Seong-Min, 2019. "Directional spillover effects between ASEAN and world stock markets," Journal of Multinational Financial Management, Elsevier, vol. 52.

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