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http://ssrn.com/abstract=1263402
 
 

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


Giancarlo Corsetti


European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Roma Tre University - Department of Economics; Centre for Economic Policy Research (CEPR)

Marcello Pericoli


Bank of Italy

Massimo Sbracia


Bank of Italy

September 4, 2005

Journal of International Money and Finance, Vol. 24, 2005

Abstract:     
This paper builds on a standard factor model of stock market returns to reconsider recent empirical literature on contagion in financial markets based on bivariate correlation analysis. According to this literature, contagion is defined as a structural break in the linear transmission mechanism of financial shocks. Using our framework, we show that the result of 'no contagion, only interdependence' stressed by recent contributions is due to arbitrary and unrealistic restrictions on the variance of country-specific shocks. We focus on the international effects of the Hong Kong stock market crisis of October 1997 as a case study. For plausible values of the variance of country-specific shocks in Hong Kong, current tests cannot reject the null of interdependence for 16 countries out of a sample of 17. Our analysis strongly questions such conclusion, finding evidence of 'contagion' for at least five countries.

Number of Pages in PDF File: 23

Keywords: Contagion; Financial crisis; Factor model; Correlation analysis

JEL Classification: F30, C10, G10, G15

Accepted Paper Series


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Date posted: September 5, 2008  

Suggested Citation

Corsetti, Giancarlo and Pericoli, Marcello and Sbracia, Massimo, Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion (September 4, 2005). Journal of International Money and Finance, Vol. 24, 2005. Available at SSRN: http://ssrn.com/abstract=1263402

Contact Information

Giancarlo Corsetti
European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )
Via dei Roccettini 9
via delle Fontanelle 10
50016 San Domenico di Fiesole, Florence 50014
Italy
Roma Tre University - Department of Economics ( email )
via Ostiense, 139
Rome, 00154
Italy
+39 06 5737 4056 (Phone)
+39 06 5737 4093 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Marcello Pericoli (Contact Author)
Bank of Italy ( email )
Via Nazionale 91
00184 Roma
Italy
HOME PAGE: http://www.bancaditalia.it
Massimo Sbracia
Bank of Italy ( email )
Via Nazionale 91
00184 Roma
Italy
+39 06 4792 3860 (Phone)
+39 06 4792 4118 (Fax)
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