No Contagion, Only Interdependence: Measuring Stock Market Comovements

No Contagion, Only Interdependence: Measuring Stock Market Comovements

  • Kristin J. Forbes
  • Roberto Rigobon

Article first published online: 17th December 2002 DOI: 10.1111/0022-1082.00494

Abstract


Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.

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