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Fatal attraction: Using distance to measure contagion in good times as well as bad
Author(s) -
Bayoumi Tamim,
Fazio Giorgio,
Kumar Manmohan,
MacDonald Ronald
Publication year - 2007
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2007.01.001
Subject(s) - equity (law) , economics , measure (data warehouse) , emotional contagion , attraction , econometrics , work (physics) , monetary economics , financial economics , psychology , computer science , social psychology , mechanical engineering , linguistics , philosophy , database , political science , law , engineering
This paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of “positive contagion,” in which capital flows to emerging markets in a herd‐like manner largely unrelated to fundamentals. Identifying such periods of “fatal attraction” is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.