No Contagion, Only Interdependence: Measuring Stock Market Co-movements, Issue 7267
National Bureau of Economic Research, 1999 - Contagion (Social psychology) - 39 pages
This paper examines stock market co-movements. It begins with a discussion of several conceptual issues involved in measuring these movements and how to test for contagion. Standard tests examine if cross-market correlation in stock market returns increase during a period of crisis. The measure of cross-market correlations central to this standard analysis, however, is biased. The unadjusted correlation coefficient is conditional on market movements over the time period under consideration, so that during a period of turmoil when stock market volatility increases, standard estimates of cross-market correlations will be biased upward. It is straightforward to adjust the correlation coefficient to correct for this bias. The remainder of the paper applies these concepts to test for stock market contagion during the 1997 East Asian crises, the 1994 Mexican peso collapse, and the 1987 U.S. stock market crash. In each of these cases, tests based on the unadjusted correlation coefficients find evidence of contagion in several countries, while tests based on the adjusted coefficients find virtually no contagion. This suggests that high market co-movements during these periods were a continuation of strong cross-market linkages. In other words, during these three crises there was no contagion, only interdependence
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1994 Mexican peso 1997 East Asian adjust the correlation adjusting the frequency aggregate shocks Argentina central results changing market volatility contagion occurred correlations between Hong cross-market correlations increase cross-market linkages currency returns define the period East Asian crises economic fundamentals equation estimating local currency evidence of contagion frequency of returns full period highly correlated Hong Kong crash Hong Kong market impact Indonesia interdependence interest rate controls international propagation investor Korea Kristin Forbes Malaysia market liquidity market turmoil measuring stock market Mexican peso collapse Mexican Peso Crisis modifying period definitions NBER Netherlands period of relative period of turmoil periods of market Philippines propagation mechanisms robustness tests sample sensitivity test source of contagion stability period stock market co-movements stock market contagion stock market crash stock market returns tests are based tests based tests for contagion Thailand turmoil period U.S. dollars U.S. stock market unadjusted correlation coefficients variance-covariance matrix vary the interest