CORRELATION COEFFICIENTS, HETEROSKEDASTICITY AND CONTAGION OF FINANCIAL CRISES

Gawon Yoon

Manchester School, 2005, vol. 73, issue 1, 92-100

Abstract: A significant increase in the correlation coefficients of returns across countries during periods of high turbulence is regarded as evidence of the contagion of financial crises. However, heteroskedasticity is known to cause correlation coefficients to be biased upward. This note shows that correlation coefficients can be biased downward under heteroskedasticity when returns are following stochastic unit root processes. Further, returns are known to be nonlinear, so correlation coefficients might not be very useful in measuring relations between them. These results indicate that the time‐series behavior of returns needs to be more thoroughly studied prior to measuring the contagion of financial crises with correlation coefficients.

Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://doi.org/10.1111/j.1467-9957.2005.00426.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:manchs:v:73:y:2005:i:1:p:92-100

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1463-6786

Access Statistics for this article

Manchester School is currently edited by Keith Blackburn

More articles in Manchester School from University of Manchester Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().