No Contagion, Only Interdependence: Measuring Stock Market Comovements

Posted: 25 Oct 2002

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Abstract

Heteroscedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market co-movement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market co-movement in all periods, however, which we call interdependence.

Keywords: Contagion, Correlations, Heteroscedasticity, Interdependence, Comovement, Currency Crises, Asian Crisis, Mexican Crisis

JEL Classification: F30, F40, G15

Suggested Citation

Forbes, Kristin J. and Rigobon, Roberto, No Contagion, Only Interdependence: Measuring Stock Market Comovements. Journal of Finance, Vol. 43, No. 5, October 2002. Available at SSRN: https://ssrn.com/abstract=333222

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-447
Cambridge, MA 02142
United States
617-258-8374 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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