Fatal Attraction: A New Measure of Contagion


Tamim Bayoumi ; Manmohan S. Kumar ; Giorgio Fazio ; Ronald MacDonald

Publication Date:

April 1, 2003

Electronic Access:

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Disclaimer: 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


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 it 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.


Working Paper No. 2003/080



Publication Date:

April 1, 2003



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