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No Contagion, Only Interdependence: Measuring Stock Market Comovements
Author(s) -
Forbes Kristin J.,
Rigobon Roberto
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00494
Subject(s) - economics , volatility (finance) , heteroscedasticity , stock market , econometrics , financial contagion , shock (circulatory) , devaluation , monetary economics , financial economics , financial crisis , exchange rate , macroeconomics , medicine , paleontology , horse , biology
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.