Bad Bad Contagion

45 Pages Posted: 28 Sep 2019

See all articles by Juan M. Londono

Juan M. Londono

Board of Governors of the Federal Reserve System

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Date Written: September 6, 2019

Abstract

This paper proposes a new measure of contagion as the coincidence of large left-tail events in the idiosyncratic disturbances of international stock returns after controlling for their exposure to a global factor. Episodes of bad contagion, especially those involving a large number of countries, are followed by a significant drop in international stock returns. This predictability pattern can be understood as an international transmission effect, as bad contagion only affects countries that did not experience tail events. In addition, the negative effect of bad contagion spills over to real growth, sovereign default risk, and financial stability indicators.

Keywords: International stock markets, interconnectedness, integration, transmission, spillovers

JEL Classification: G15, F36, F65

Suggested Citation

Londono-Yarce, Juan-Miguel, Bad Bad Contagion (September 6, 2019). Available at SSRN: https://ssrn.com/abstract=3456055 or http://dx.doi.org/10.2139/ssrn.3456055

Juan-Miguel Londono-Yarce (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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