Measuring common cyclical features during financial turmoil: Evidence of interdependence not contagion

Abstract

This paper develops a test of contagion in financial markets by considering a measure of co-movement based on the notion of common cycles to detect short-run co-movements between a set of time series. We apply our methodology to the international effects of the 1994 Mexican peso crisis and the 1997 Asian crisis. Our results can be interpreted as evidence of a high level of market co-movement during all states of the world and, therefore, question the hypothesis of shift-contagion in the transmission of financial shocks during the 1997 Asian crisis, and to a lesser extent, the 1994 Mexican crisis.