No Contagion, Only Interdependence: Measuring Stock Market Comovements pdf download.
Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.
IN OCTOBER 1997,THE HONG KONG STOCK MARKET declined sharply and thenpartially rebounded.As shown in Figure 1,this movement affected marketsin North and South America,Europe,and Africa.In December 1994,the Mexican market dropped significantly,and as shown in Figure 2,this fallwas quickly reflected in other Latin American markets.Figure 3 shows thatin October 1987,the U.S.market crash affected major stock markets aroundthe world.These cases show that dramatic movements in one stock marketcan have a powerful impact on markets of very different sizes and structuresacross the globe.Do these periods of highly correlated stock market move-ments provide evidence of contagion?
Before answering this question,it is necessary to define contagion.Thereis widespread disagreement about what this term entails,and this paperutilizes a narrow definition that has historically been used in this literature. This paper defines contagion as a significant increase in cross-marketlinkages after a shock to one country (or group of countries).
No Contagion, Only Interdependence: Measuring Stock Market Comovements pdf download
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