assumptions about the variance of country-specific shocks in the market where
the crisis originates. When this variance is set equal to zero after the eruption
of the financial turmoil — as done in a number of contributions — the chances
of accepting the null of interdependence are very high.
Our preliminary empirical estimates suggests that, for the case of the Hong
Kong stock market crisis in October 1997, the variance of the country-specific
component of returns is not zero. Results from a single factor model show
that it is 2 to 7 times higher than the component that can be attributed to the
variance of global factor. For most country pairs in our sample, interdependence
can be rejected only for larger values of this ratio. Based on our estimates, we
find evidence of contagion from the Hong Kong crisis in the case of Singapore
and the Philippines, among the emerging markets, and France, Italy, the UK
and (weakly) Germany, among the advanced countries. In contrast, the bias in
conditional tests arbitrarily setting λ = O is quite severe. For all the countries in
our sample but one (Italy), these tests would accept the null of interdependence.
The empirical analysis of this paper has been kept simple (we used a single
factor model of returns), and as close as possible to correlation analysis. It
should be clear, however, that the issue of controlling for country-specific shocks
in contagion analysis is limited neither to correlation analysis, nor to a single-
factor model of returns, but should be addressed in all tests identifying contagion
as a structural break in the transmission mechanism.
20
More intriguing information
1. Disturbing the fiscal theory of the price level: Can it fit the eu-15?2. The name is absent
3. The name is absent
4. The Values and Character Dispositions of 14-16 Year Olds in the Hodge Hill Constituency
5. The name is absent
6. For Whom is MAI? A theoretical Perspective on Multilateral Agreements on Investments
7. Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior
8. Human Resource Management Practices and Wage Dispersion in U.S. Establishments
9. POWER LAW SIGNATURE IN INDONESIAN LEGISLATIVE ELECTION 1999-2004
10. ISO 9000 -- A MARKETING TOOL FOR U.S. AGRIBUSINESS