Fatal Attraction: A New Measure of Contagion

Tamim Bayoumi, Manmohan Kumar, Giorgio Fazio and Ronald MacDonald

No 2003/080, IMF Working Papers from International Monetary Fund

Abstract: This paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice it measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of "positive contagion," in which capital flows to emerging markets in a herd-like manner, largely unrelated to fundamentals. Identifying such periods of "fatal attraction" is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.

Keywords: WP; crisis; Contagion; international capital flows; emerging market crises; crisis outbreak; tequila crisis; market correlation; Asia crisis; Russia crisis; exchange rate panel; uninformed investor; Emerging and frontier financial markets; Real exchange rates; Capital inflows; Exchange rates; Stock markets; Asia and Pacific (search for similar items in EconPapers)
Pages: 21
Date: 2003-04-01
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Citations: View citations in EconPapers (15)

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