Empirical Modeling of Contagion: A Review of Methodologies

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The existing literature suggests a number of alternative methods to test for the presence of contagion during financial market crises. This paper reviews those methods and shows how they are related in a unified framework. A number of extensions are also suggested that allow for multivariate testing, endogeneity issues, and structural breaks.

Identifying the global transmission of the 2007–2009 financial crisis in a GVAR model

“…By contrast, there is a large and prominent literature on the global transmission of past nancial crises, with a strong interest in the role of contagion and related channels (e.g. Forbes and Rigobon (2002), Bekaert, Harvey, and Ng (2005); Bae et al (2003), Karolyi (2003), De Gregorio and Valdes (2001), Dungey et al (2004)). …”

Crisis Periods, Contagion and Integration Effects in the Major African Equity Markets During the 2007-2009 Global Financial Crisis

“…Dungey et al [2005] asserted that a range of different methodologies of testing for the existence of contagion make it difficult to assess the evidence for and against contagion. Rigobon [2002] emphasized that "(…) there is no accordance on what contagion means".…”

Are Free Trade Agreements contagious?

“…After determining FTA that are effectively implemented, Holmes (2005) show evidence of "mercantile interests" in assuring export market access are a important determinants. Dungey et al (2004) review the empirical models of contagion in macro crisis literature, classifying the methodologies in: latent factor; correlation analysis; vector autoregression (VAR); co-exceedance approach and probability models. Our work is mainly related with the latter approach, developed in the work by Eichengreen, Rose, andWyplosz (1995, 1996), where a dichotomic measure of crisis is the dependent variable and the explanatory variable is the same measure for the rest of the countries, using trade and macro weights in order to analyse the channels of contagion.…”