A New Approach to Measuring Financial Contagion

Dice Center Working Paper No. 2000-13

56 Pages Posted: 8 Nov 2000

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

George Andrew Karolyi

Cornell University - SC Johnson College of Business

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

Abstract

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

Bae, Kee-Hong and Karolyi, George Andrew and Stulz, Rene 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

Kee-Hong Bae

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

George Andrew Karolyi

Cornell University - SC Johnson College of Business ( email )

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ITHACA, NY 14853
United States
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HOME PAGE: http://https://www.johnson.cornell.edu/faculty-research/faculty/gak56/

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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1000 Brussels
Belgium

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