Working Paper: CEPR ID: DP3870
Authors: Tamim Bayoumi; Giorgio Fazio; Manmohan Kumar; Ronald MacDonald
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.
Keywords: Capital inflows; Contagion; Emerging market crises
JEL Codes: F32; F34; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive contagion (F65) | crises (H12) |
| herd behavior (C92) | positive contagion (F65) |
| distance (R12) | positive contagion (F65) |
| coefficient on distance (C29) | leading indicator of crises (F44) |
| positive contagion (F65) | negative contagion (F65) |
| periods of positive contagion (E32) | vulnerabilities in emerging markets (F65) |