DP3870 Fatal Attraction
|Author(s):||Tamim Bayoumi, Giorgio Fazio, Manmohan Kumar, Ronald MacDonald|
|Publication Date:||April 2003|
|Keyword(s):||capital inflows, contagion, emerging market crises|
|JEL(s):||F32, F34, O16|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3870|
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.