On the Measurement of the International Propagation of Shocks, Issue 7354
National Bureau of Economic Research, 1999 - Contagion (Social psychology) - 40 pages
In this paper I offer an alternative identification assumption that allows one to test for changing patterns regarding the international propagation of shocks when endogenous variables, omitted variables, and heteroskedasticity are present in the data. Using this methodology, I demonstrate that the propagation mechanisms of 36 stock markets remained relatively stable throughout the last three major international crises which have been associated with 'contagion' (i.e., Mexico 1994, Hong Kong 1997, and Russia 1998). These findings cast considerable doubt upon theories that suggest that the propagation of shocks is crisis contingent, and driven by endogenous liquidity issues, multiple equilibria, and political contagion. Rather, these findings would seem to support theories that identify such matters as trade, learning, and aggregate shocks as the primary transmission mechanisms in this process.
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aggregate shocks alternative hypothesis Argentina assume asymptotic Beta Brazil Calvo coefficients column countries covariance matrix crash crisis contingent crisis window CT 9 CT CT Ct different from zero Economics endogenous variables equation F-test Hausman Specification Test heteroskedasticity Hong Kong crisis identification assumption implied indicates Insert table instrumental variable interpretation instrumental variables estimators interest rates international propagation investors Kong and Russian Lags liquidity shock margin calls Mark Bils Mark McClellan measured Mexican crisis Mexico Mimeo NBER NBER Working Paper null hypothesis omitted variables pairs percent percentage of rejections plim propagation mechanism propagation of shocks regime reject the hypothesis relative vulnerability Rigobon Russian crisis sensitivity analysis significantly different South Africa speculative attacks standard deviation Stdev stock market indexes structural shocks Subscription T2 error beta+ test for changes test is rejected theories Tl error tranquil period tranquil window transmission mechanism variance increases volatility www.nber.org