Econometric Issues in the Analysis of Contagion

By M. Hashem, Pesaran, Andreas Pick, Mardi Dungey, Teresa Leitão, Roger Moon, Geert Rider, Til. Social Science Research Network, 2007

368 citations recorded by the source corpus.

This paper presents a canonical, econometric model of contagion and investigates the conditions under which contagion can be distinguished from inter-dependence. In a two-country (market) set-up it is shown that for a range of fundamentals the solution is not unique, and for sufficiently large values of the contagion coefficients it has interesting bifurcation properties with bimodel density functions. The extension of the model to herding behaviour is also briefly discussed. To identify contagion effects in the presence of inter-dependencies the equations for individual markets or countries must contain country (market) specific forcing variables. This sheds doubt on the general validity of the correlation based tests of contagions recently proposed in the literature which do not involve any country (market) specific fundamentals. We show that ignoring inter-dependence can introduce an upward bias in the estimate of the contagion coefficient, and using Monte Carlo experiments we show that this could be substantial. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.)

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/9731365271506f594275f5e8f2e4a8442213a26d

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Citations in the corpus

Measuring Sovereign Contagion in Europe (2014, neutral): “Contagion is an unobservable shock and therefore most empirical techniques have problems dealing with omitted variables and simultaneous (1)For a survey indicating the shortcomings of most empirical methods see Rigobon (2001). (2)See Forbes and Rigobon (2002), as well as Dungey and Zhumabekova (2001”
Structural breaks in volatility spillovers between international financial markets: Contagion or mere interdependence? (2014, methodology): “This definition goes back to Forbes and Rigobon (2002) and has also been employed, for example, by Caporale et al. (2005), Pesaran and Pick (2007), Baele and Inghelbrecht (2010) and Billio and Caporin (2010).”
Bank/Sovereign Risk Spillovers in the European Debt Crisis (2012, background): “The literature on contagion is very broad; excellent overviews can be found in Pericoli and Sbracia (2003), Dungey, Fry, Gonzalez-Hermosillo, and Martin (2005) and Pesaran and Pick (2007).”
Testing for Threshold Effects in Regression Models (2010, background): “In empirical finance, Pesaran and Pick (2007) argue that the effect of financial contagion (see, e.g., Forbes and Rigobon 2002) can be described as a discontinuous threshold effect, hence testing for threshold effects implies testing for the presence of financial contagion.”
Testing for East-West Contagion in the European Banking Sector During the Financial Crisis (2011, background): “However, as global banks performance and strategies in uence global nancial conditions, the increase of signi cant common factors may re ect an endogeneity problem (Pesaran and Pick, 2007).”