A multicountry measure of comovement and contagion in international markets: definition and applications

Nina Tessler, Itzhak Venezia*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

This paper introduces a new measure of comovement and contagion of crises between countries, applies it to 16 world crises, including the current COVID-19 pandemic, and provides insights regarding the occurrence of contagion during these crises. Our measure demonstrates several important advantages over the extant measures of contagion. Traditional measures of contagion, such as increase in correlation, could be limited in scope since they are bivariate, whereas contagion is often a regional or global market phenomenon. The multiple comparisons that the binary correlations require in such cases could yield inconclusive or contradictory results and fail to capture the broad effects of the crisis on the regions. Moreover, during crises, a country’s stock market volatility often increases, a phenomenon that could lead to a spurious indication of increased correlation with other countries (contagion). Corrections for this bias have been suggested, but they could adversely affect the power of the contagion tests and fail to detect genuine contagion. Using simulations, we show the robustness of our measure to changes in volatility and demonstrate its power to affirm instances of genuine contagion. Support for the power of our measure relative to an extant leading measure of contagion is also provided by analysis of the cases of the 1994 Mexican peso crisis, the 1997 East Asian crisis, and Black Monday, the 1987 US stock market crash.

Original languageEnglish
Pages (from-to)1307-1330
Number of pages24
JournalReview of Quantitative Finance and Accounting
Volume58
Issue number4
DOIs
StatePublished - May 2022

Bibliographical note

Publisher Copyright:
© 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.

Keywords

  • Behavioral finance
  • Comovement
  • Contagion
  • Financial stability
  • Global financial crisis
  • Herding
  • International stock markets

Fingerprint

Dive into the research topics of 'A multicountry measure of comovement and contagion in international markets: definition and applications'. Together they form a unique fingerprint.

Cite this