Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion

Preprint
Publisher Website
Google Scholar
  • 1 January 2002
    • preprint
      • Published in RePEc
Abstract
This Paper develops a test of contagion in financial markets based on bivariate correlation analysis, which generalizes existing tests, and applies it to the international effects of the Hong Kong stock market crisis of October 1997. Contagion is defined as a structural break in the international transmission of financial shocks. For plausible values of the variance of country-specific shocks in Hong Kong, our test finds evidence of contagion for 5 countries out of a sample of 17. This is in sharp contrast with the findings of recent literature, according to which there is 'no contagion, only interdependence'. We show that this strong result in the literature is due to arbitrary and unrealistic restrictions on the variance of country-specific shocks.
All Related Versions

This publication has 0 references indexed in Scilit: