Contagion: How to Measure It?

Roberto Rigobon

No 8118, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The empirical literature on contagion has mainly measured the propagation of shocks across countries using daily stock markets, interest rates, and exchange rates. Several methodologies have been used for this purpose, however, the properties of the data introduces important limitations on the implementation of these procedures, as well as on the interpretation of the results. This paper, has three objectives: First, it evaluates some of the techniques that have been used frequently to measure contagion. The paper argues that if the data suffers from heteroskedasticity (conditional or not), omitted variables and simultaneous equation problems, the conclusions drawn from most of the procedures could be biased. Second, the paper summarizes two new procedures that have been developed to cope with these problems. One methodology is aimed to test for the stability of parameters, while the other one estimates consistently the contemporaneous relationship across countries. Finally, the paper estimates (consistently) the contemporaneous transmission mechanism between emerging stock markets, and bond markets. Furthermore, it is found that regional variables, as well as trade linkages, constitute a sizeable explanation of the strength of the propagation of shocks across bond markets, but not as important in stock markets.

JEL-codes: C30 F32 (search for similar items in EconPapers)
Date: 2001-02
New Economics Papers: this item is included in nep-ecm, nep-fmk and nep-ifn
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

Published as Contagion: How to Measure It? , Roberto Rigobon. in Preventing Currency Crises in Emerging Markets , Edwards and Frankel. 2002

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