Market Integration and Contagion
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative
Hong Kong University of Science & Technology (HKUST) - Department of Finance
March 14, 2002
EFA 2002 Berlin Meetings Presented Paper
Contagion is usually defined as correlation between markets in excess of what would be implied by economic fundamentals. However, there is considerable disagreement regarding the definitions of the fundamentals, how the fundamentals might differ across countries and the mechanisms that link the fundamentals to asset returns. Our research takes as a starting point, a two-factor model with time-varying betas that accommodates various degrees of market integration between the different markets. We apply this model to stock returns in three different regions, Europe, South-East Asia and Latin America. In addition to providing new insights on contagion during crisis periods, we document patterns through time in world and regional market integration and measure the proportion of volatility driven by global, regional, as well as, local factors.
Number of Pages in PDF File: 39
JEL Classification: G15, G12
Date posted: March 22, 2002
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