Measuring Contagion: Conceptual and Empirical Issues

Uncovering equity market contagion among BRICS countries: An application of the multivariate GARCH model

“…The literature divides the concept of contagion into two broad categories (Dornbusch et al, 2000;Forbes & Rigobon, 2001;Masson, 1998), namely, fundamental-based and investor-behaviour contagions.…”

“…Different empirical approaches emerged, which could be classified in four different categories (Forbes & Rigobon, 2001): the analysis of cross-market correlation coefficients; GARCH frameworks; cointegration and probit models. The cross-market correlation test measures the correlation in returns between two markets at two distinctly different time periods, the tranquil and turmoil periods.…”

“…Nonetheless, cross-correlation models for the analysis of contagion have been criticised for their inability to account for heteroscedasticity in the variables used. To remedy this criticism, Forbes and Rigobon (2001) and Bouaziz, Selmi, and Boujelbene (2012) suggest the use of the generalised autoregressive conditional heteroscedasticity (GARCH) model as per Bollerslev (1986).…”

“…The fourth group of empirical analysis assesses financial contagion by making use of exogenous events and microeconomic rather than macroeconomic data (Forbes and Rigobon, 2001). The advantage of microeconomic data is that it provides a more concise and clear identification of the channels through which contagion can occur.…”

“…The advantage of microeconomic data is that it provides a more concise and clear identification of the channels through which contagion can occur. For example, Forbes and Rigobon (2001) examined how different types of firms were globally affected by the Russian and Asian Crises and how these crises affected other firms worldwide. The authors showed that firms that transact with countries that are affected by economic crisis are also significantly affected; this therefore suggests that trade channels are important in transmitting contagion.…”