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GIORGIO FAZIO

Fatal attraction: Using distance to measure contagion in good times as well as bad

  • Authors: BAYOUMI T; FAZIO G; MANMOHAN K; MACDONALD R
  • Publication year: 2007
  • Type: Articolo in rivista (Articolo in rivista)
  • Key words: Contagion, Capital inflows, Emerging market crises
  • OA Link: http://hdl.handle.net/10447/22441

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.