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Testing for contagion in international financial markets: which way to go?

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Abstract

This paper tests for the existence of contagion during the 1997/98 Asian crisis. We interpret contagion as a significant change in the way that country-specific shocks are transmitted across international financial markets. Using the full-information framework of Favero and Giavazzi (2002) we find that the null hypothesis of no contagion is widely rejected. We also uncover evidence of an asymmetric transmission of shocks. Since our results contrast with those obtained by Rigobon (2001, 2002) using a limited-information methodology we present Monte Carlo simulations which show that certain necessary conditions must be satisfied for this method to have power. For parameter values in line with our econometric estimations we conclude that the power of the limited-information approach remains relatively low.

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  • Sébastien Wälti, 2003. "Testing for contagion in international financial markets: which way to go?," IHEID Working Papers 04-2003, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heiwp04-2003
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    Cited by:

    1. Guglielmo Caporale & Nikitas Pittis & Nicola Spagnolo, 2006. "Volatility transmission and financial crises," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(3), pages 376-390, September.
    2. Brière, Marie & Chapelle, Ariane & Szafarz, Ariane, 2012. "No contagion, only globalization and flight to quality," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1729-1744.
    3. Saleem, Kashif, 2008. "International linkage of the Russian market and the Russian financial crisis: a multivariate GARCH analysis," BOFIT Discussion Papers 8/2008, Bank of Finland Institute for Emerging Economies (BOFIT).
    4. Saleem, Kashif, 2008. "International linkage of the Russian market and the Russian financial crisis : a multivariate GARCH analysis," BOFIT Discussion Papers 8/2008, Bank of Finland, Institute for Economies in Transition.
    5. repec:zbw:bofitp:2008_008 is not listed on IDEAS

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    More about this item

    Keywords

    Contagion; Nonlinearities; International financial markets; Asian crisis; Simultaneous equations models;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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