Bad Bad Contagion
Juan M. Londono ()
No 1178, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
Bad contagion, the downside component of contagion in international stock markets, has negative implications for financial stability. I propose a measure for the occurrence and severity of global contagion that combines the factor-model approach in Bekaert et al. (2005) with the model-free or co-exceedance approach in Bae et al. (2003). Contagion is measured as the proportion of international stock markets that simultaneously experience unexpected returns beyond a certain threshold. I decompose contagion into its downside or bad component (the co-exceedance of low returns) and its upside or good component (the co-exceedance of high returns). I find that episodes of bad contagion are followed by a significant drop in country-level stock index prices and by a deterioration of financial stability indicators, especially for more open economies.
Keywords: International stock markets; Bad contagion; Downside contagion; interconnectedness; International integration; Financial stability; SRISK (search for similar items in EconPapers)
JEL-codes: F36 F65 G15 (search for similar items in EconPapers)
Pages: 42 pages
New Economics Papers: this item is included in nep-ifn and nep-sog
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Journal Article: Bad bad contagion (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1178
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