Discussion Paper Details

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Title: Fatal Attraction

Author(s): Tamim Bayoumi, Giorgio Fazio, Manmohan Kumar and Ronald MacDonald

Publication Date: April 2003

Keyword(s): capital inflows, contagion and emerging market crises

Programme Area(s): International Macroeconomics

Abstract: 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, 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.

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Bibliographic Reference

Bayoumi, T, Fazio, G, Kumar, M and MacDonald, R. 2003. 'Fatal Attraction'. London, Centre for Economic Policy Research.