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Bad Bad Contagion

Juan M. Londono ()

No 1178, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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
Date: 2016-09
New Economics Papers: this item is included in nep-ifn and nep-sog
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Journal Article: Bad bad contagion (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1178

DOI: 10.17016/IFDP.2016.1178

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