No Contagion, Only Interdependence: Measuring Stock Market Co-Movements

Kristin Forbes
Roberto Rigobon
Publication Type: 
Papers
Publication Year: 
2002

Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market co-movement 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 co-movement in all periods, however, which we call interdependence.

JEL Codes: 
F30, F40
Region: 
Latin America/Caribbean
Region: 
East Asia and the Pacific
Region: 
South and Central Asia
Region: 
United States and Canada
Country: 
Mexico
Country: 
USA
Topic: 
International Finance
Topic: 
Risk
Topic: 
Economic History