Fatal Attraction

31 Pages Posted: 10 Jun 2003

See all articles by Tamim Bayoumi

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Giorgio Fazio

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Manmohan Kumar

International Monetary Fund (IMF) - Research Department

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 2003

Abstract

This Paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice, measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of 'positive contagion,' in which capital flows to emerging markets in a herd-like manner largely unrelated to fundamentals. Identifying such periods of 'fatal attraction' is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.

Keywords: Contagion, capital inflows, emerging market crises

JEL Classification: F32, F34, O16

Suggested Citation

Bayoumi, Tamim and Fazio, Giorgio and Kumar, Manmohan and MacDonald, Ronald R., Fatal Attraction (April 2003). CEPR Discussion Paper No. 3870. Available at SSRN: https://ssrn.com/abstract=413422

Tamim Bayoumi (Contact Author)

International Monetary Fund (IMF) ( email )

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Centre for Economic Policy Research (CEPR)

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Giorgio Fazio

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

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+44 141 5525589 (Fax)

Manmohan Kumar

International Monetary Fund (IMF) - Research Department ( email )

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202-589-7771 (Fax)

Ronald R. MacDonald

University of Strathclyde in Glasgow - Department of Economics ( email )

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Glasgow G4 0LN
United Kingdom
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Government of New Zealand - Department of Economics

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New Zealand

CESifo (Center for Economic Studies and Ifo Institute)

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