Econometric Issues in the Analysis of Contagion

Mohammad Pesaran and Andreas Pick

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper presents a canonical, econometric model of contagion and investigates the conditions under which contagion can be distinguished from inter-dependence. In a two-country (market) set-up it is shown that for a range of fundamentals the solution is not unique, and for sufficiently large values of the contagion coefficients it has interesting bifurcation properties with bimodel density functions. The extension of the model to herding behaviour is also briefly discussed. To identify contagion effects in the presence of inter-dependencies the equations for individual markets or countries must contain country (market) specific forcing variables. This sheds doubt on the general validity of the correlation based tests of contagions recently proposed in the literature which do not involve any country (market) specific fundamentals. We show that ignoring inter-dependence can introduce an upward bias in the estimate of the contagion coefficient, and using Monte Carlo experiments we show that this could be substantial.

Keywords: contagion; inter-dependence; identification; financial crises (search for similar items in EconPapers)
JEL-codes: C10 G10 G15 (search for similar items in EconPapers)
Pages: 51
Date: 2004-01
New Economics Papers: this item is included in nep-ecm and nep-ifn
Note: EM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Econometric issues in the analysis of contagion (2007)
Working Paper: Econometric Issues in the Analysis of Contagion (2004)
Working Paper: Econometric Issues in the Analysis of Contagion (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0402

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