Multivariate Contagion and Interdependence
33 Pages Posted: 23 Jan 2006 Last revised: 25 Jan 2009
Date Written: November 1, 2008
This paper proposes a multivariate test to measure the statistical and economic significance of contagion through analysis of extreme unobserved common shocks. Contagious episodes are endogenously determined with no need, but the possibility, to specify the source country. Application to a panel of equity returns during the Asian crisis of 1997-98 finds that interdependencies are substantially more important than contagion. However, the periods of contagion evident show that it is short-lived, split between positive and negative movements and reverses quickly. In comparison to other Asian crisis countries, Hong Kong was the main driver of contagion in the Asian crisis. The proposed methodology and the empirical findings provide a more detailed picture of contagion than commonly applied tests.
Keywords: contagion, interdependence, common movements, panel data, fixed time effects, Asian crisis, equity markets, endogenous crisis period, asymmetries
JEL Classification: C10, C51, F36, G14
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