Correlation Analysis of Financial Contagion: What One Should Know before Running a Test

Giancarlo Corsetti, Marcello Pericoli and Massimo Sbracia

No 408, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper presents a general test of contagion in financial markets based on bivariate correlation analysis � a test that can be interpreted as an extension of the normal correlation theorem. Contagion is defined as a structural break in the data generating process of rates of return. Using a factor model of returns, our theoretical framework nests leading contributions in the literature as special cases. We show that the tests proposed in the literature are conditional on a specific yet arbitrary assumption about the variance of country specific shocks. Using the Hong Kong stock market crisis in October 1997 as a representative case study, our results suggest that, for a number of pairs of country stock markets, the hypothesis of 'no contagion' can be rejected only if the variance of country specific shocks is set to levels that are not consistent with the evidence.

Keywords: contagion; financial crisis; factor model; correlation analysis (search for similar items in EconPapers)
JEL-codes: C10 F30 G10 G15 (search for similar items in EconPapers)
Date: 2001-06
References: Add references at CitEc
Citations: View citations in EconPapers (61)

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 0408/tema_408_01.pdf (application/pdf)

Related works:
Working Paper: Correlation Analysis of Financial Contagion: What One Should Know Before Running a Test (2001)
Working Paper: Correlation Analysis of Financial Contagion: What One Should Know Before Running a Test (2001)
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:bdi:wptemi:td_408_01

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().