Fatal Attraction: using distance to measure contagion in good times as well as bad

Bayoumi, T., Fazio, G., Kumar, M. and MacDonald, R. (2007) Fatal Attraction: using distance to measure contagion in good times as well as bad. Review of Financial Economics, 16(3), pp. 259-273. (doi:10.1016/j.rfe.2007.01.001)

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Abstract

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.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Fazio, Dr Giorgio and MacDonald, Professor Ronald
Authors: Bayoumi, T., Fazio, G., Kumar, M., and MacDonald, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
College of Social Sciences > Adam Smith Business School
Journal Name:Review of Financial Economics
Publisher:Elsevier
ISSN:1058-3300
ISSN (Online):1873-5924
Published Online:02 February 2007

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