No Contagion, Only Interdependence: Measuring Stock Market Comovements

Abstract

Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients~i.e., no contagion! during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.

Financial Press and Stock Markets in Times of Crisis

“…These results confirm certain previous empirical findings on the higher correlation between markets in period of financial crises (e.g., Forbes and Rigobon (2002); Chiang et al (2007)), especially in periods of higher volatility of the U.S. stock markets (Longin and Solnik (2001)). Secondly, they would confirm recent evidence on the increasing interdependence of European stock markets ( (Jondeau and Rockinger (2006)).…”

International Stock Market Integration: Central and South Eastern Europe Compared

“…Clearly, financial integration has a direct consequences for financial stability Our results suggest that Central European stock markets are highly integrated with the developed markets. The conditional correlations between Central European and Western European stock markets reach the value around 0.6, which is close to the correlation reported by literature for the US and Canadian stock markets (see, for example, Longin andSolnik, 1995, or Forbes andRigobon, 2002). On the other hand, the degree of comovements between Serbian as well as Macedonian stock markets with developed markets is practically zero.…”

Measuring Comovements by Regression Quantiles

“…In essence, our approach is a semi-parametric estimation of the copula and permits to conduct well defined tests. It is instructive to see how the comovement box fits the framework used by Forbes and Rigobon (2002). They propose the following model for contagion:…”