Dice Center Working Paper No. 2000-13
56 Pages Posted: 8 Nov 2000
Date Written: August 2000
This paper proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the co-incidence of extreme return shocks across countries within a region and across regions that cannot be explained by linear propagation models of shocks. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion, when measured by the co-incidence within and across regions of extreme return shocks, is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.
JEL Classification: G10,G15,F30
Suggested Citation: Suggested Citation
Bae, Kee-Hong and Karolyi, George Andrew and Stulz, René M., A New Approach to Measuring Financial Contagion (August 2000). Dice Center Working Paper No. 2000-13. Available at SSRN: https://ssrn.com/abstract=241634 or http://dx.doi.org/10.2139/ssrn.241634