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Rev Fin 2003; 16:717-763
© 2003 the Society for Financial Studies

A New Approach to Measuring Financial Contagion

Kee-Hong Bae
Korea University

G. Andrew Karolyi
Ohio State University

René M. Stulz
Ohio State University and NBER

Address correspondence to René M. Stulz, Ohio State University, Fisher College of Business, 2100 Neil Ave. 806 A Fisher Hall, Columbus, OH 43210, or e-mail: stulz{at}cob.osu.edu.

Abstract

This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.


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