Fatal Attraction: A New Measure of Contagion

By Tamim Bayoumi, Manmohan S. Kumar, Giorgio Fazio, Ronald MacDonald

April 1, 2003

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Tamim Bayoumi, Manmohan S. Kumar, Giorgio Fazio, and Ronald MacDonald. Fatal Attraction: A New Measure of Contagion, (USA: International Monetary Fund, 2003) accessed November 8, 2024

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

Summary

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.

Subject: Balance of payments, Capital inflows, Emerging and frontier financial markets, Exchange rates, Financial markets, Foreign exchange, Real exchange rates, Stock markets

Keywords: Asia and Pacific, Asia crisis, Capital inflows, Contagion, Crisis, Crisis outbreak, Emerging and frontier financial markets, Emerging market crises, Exchange rate panel, Exchange rates, International capital flows, Market correlation, Real exchange rates, Russia crisis, Stock markets, Tequila crisis, Uninformed investor, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/080
Stock No:

WPIEA0802003
ISBN:

9781451850321
ISSN:

1018-5941

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