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An analysis of contagion among Asian countries using the canonical model of contagion

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  • Ribeiro, André L.P.
  • Hotta, Luiz K.

Abstract

Understanding the dependence among economies is relevant to policy makers, central banks and investors in the decision-making process. One important issue for study is the existence of contagion among economies. This work considers the Canonical Model of Contagion by Pesaran and Pick (Journal of Economic Dynamics and Control, 2007), which differentiates contagion from interdependence. The ordinary least squares estimator of this model is biased by the endogenous variables in the model. In this study, instrumental variables are used to decrease the bias of the ordinary least squares estimator. The model is extended to the case of heteroskedastic errors, features that are generally found in financial data. We postulate the conditional volatility of the performance indices as instrumental variables and analyze the validity of these instruments using Monte Carlo simulations. Monte Carlo simulations estimate the distributions of the estimators under the null hypothesis. Finally, the canonical model of contagion is used to analyze the contagion among seven Asian countries.

Suggested Citation

  • Ribeiro, André L.P. & Hotta, Luiz K., 2013. "An analysis of contagion among Asian countries using the canonical model of contagion," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 62-69.
    • Handle: RePEc:eee:finana:v:29:y:2013:i:c:p:62-69
    DOI: 10.1016/j.irfa.2013.03.014
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    References listed on IDEAS

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    1. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    2. Andrews,Donald W. K. & Stock,James H. (ed.), 2005. "Identification and Inference for Econometric Models," Cambridge Books, Cambridge University Press, number 9780521844413, January.
    3. Nelson, Charles R & Startz, Richard, 1990. "The Distribution of the Instrumental Variables Estimator and Its t-Ratio When the Instrument Is a Poor One," The Journal of Business, University of Chicago Press, vol. 63(1), pages 125-140, January.
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    1. André L P Ribeiro & Luiz K Hotta, 2016. "Estimation of the Heteroskedastic Canonical Contagion Model with Instrumental Variables," PLOS ONE, Public Library of Science, vol. 11(12), pages 1-13, December.

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