Contagion Measures Research Articles

Pricing Effects of Crossholdings in a Network Environment

We consider an economy of firms with cross-held securities. The value of the debt contract in such a network depends on the value of other debt contracts. This has the potential to induce contagion effects. The article proposes a Monte-Carlo algorithm to solve the problem of debt prices in an economy with crossholdings. As the number of firms in the network increases, debt yields increase only to a certain level, which we interpret as a measure of balance-sheet contagion. An increase in variance of the fundamental assets of one firm is almost totally absorbed within the debt yield of that firm. Heterogeneity of debt principals has the potential to induce large contagion effects.

Contagion and surprises of the stock market returns

This article provides an empirical analysis for the existence and direction of Granger causality between Turkey and Russian Federation by using structural breaks of seven developing stock market returns as a measure of contagion. Empirical results also reveal that there is an increase in the number of causalities in turmoil periods.

Fatal attraction: Using distance to measure contagion in good times as well as bad

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.

Measuring Contagion in the South‐East Asian Economic Crisis: An Exploration Using Artificial Neural Networks

An artificial neural network methodology is used to develop a new measure of contagion using exchange rate data from the Asian Crisis of 1997 and beyond. Connection weight changes during retraining of networks used to forecast exchange rates form the basis of this measure. These weight changes are used in obtaining a contribution factor for independent variables used in a forecasting process. Volatilities of contribution factors form the basis of the measure of contagion obtained. These volatilities are statistically validated through a series of simulations where critical values for them are derived. The measures of contagion obtained are then matched to concurrent economic and financial shocks that occurred during the crisis. It is found that there is good correlation between these events and the contagion measures obtained.

Emotional Responsivity in Children with Autism, Children with Other Developmental Disabilities, and Children with Typical Development

Twenty six children with autism, 24 children with developmental disabilities, and 15 typically developing children participated in tasks in which an adult displayed emotions. Child focus of attention, change in facial tone (i.e., hedonic tone), and latency to changes in tone were measured and summary scores of emotional contagion were created. Group differences existed in the ratio of episodes that resulted in emotional contagion. Correlations existed between measures of emotional contagion, measures of joint attention, and indices of severity of autism. Children with autism demonstrated muted changes in affect, but these responses occurred much less frequently than in comparison groups. The findings suggest directions for early identification and early treatment of autism.

Asymmetric extreme interdependence in emerging equity markets

AbstractWe assess the extent of integration between stock markets during stressful periods using the concept of copulas. Our methodology consists of fitting copulas to simultaneous exceedances of high thresholds, and computing copula‐based measures of interdependence and contagion. Using 21 pairs of emerging stock markets daily returns, we investigate if dependence increases with crisis, and analyse the chances of both markets crashing together. Dependence at joint positive and negative extreme returns levels may differ. This type of asymmetry is captured by the upper and lower tail dependence coefficients. Propagation of crisis may be faster in one direction, and this feature is captured by asymmetric copulas. Copyright © 2005 John Wiley & Sons, Ltd.

Measurement of contagion in banks’ equity prices

This paper uses the co-incidence of extreme shocks to banks’ risk to examine within-country and across country contagion among large EU banks. Banks’ risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student t distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify “systemically important” banks in the EU.

Extreme Contagion in Equity Markets

Contagion can be defined as the probability of observing large return realizations simultaneously across different financial markets (co-exceedances) rather than as increases in correlations. We introduce global extreme contagion measures constructed from bivariate extremal dependence measures. The measures are used to quantify both negative and positive equity returns contagion at the inter- and intraregional level for a number of mature and emerging equity markets during the past decade. Our results suggest that (a) contagion patterns differ significantly within regions and across regions, with Latin America showing a secular increase in contagion not matched by other regions or countries; (b) contagion is higher for negative returns than for positive returns; (c) only the 1998 Russian and Brazilian crises led to a global increase in contagion; and (d) extremal dependence measures of contagion and simple correlation measures are not highly correlated, with the exception of Latin America, suggesting that the use of correlations as a proxy for contagion may be misleading.

Quantifying spatial patterns of landscapes.

In this paper we discuss information theoretical landscape indices based on data from digitized maps in grid format: measures based on Shannon's entropy, e.g. the measures of diversity and contagion; and measures based on conditional entropy, e.g. a new index which can be seen as an alternative to the measure of contagion that does not have the disadvantage of being highly correlated to the measure of diversity. We also introduce a measurement on how much information is contained in a coarse-scale map about a fine-scale map.

A Primer on Financial Contagion

Abstract. This paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks. We first review the different definitions and measures of contagion adopted by the literature. We then use a simple multi‐country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy. In particular, the model shows how crises can be transmitted across countries, without assuming ad hoc portfolio management rules or market imperfections. Finally, tracking our classification, we survey the results of the empirical literature on contagion.

A New Approach to Measuring Financial Contagion

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.

Spillovers through banking centers: a panel data analysis of bank flows

This paper presents evidence that spillovers through bank lending contributed to the transmission of currency crises during the recent episodes of financial instability in emerging markets. The innovation of the paper is that it looks beyond aggregated measures of contagion into the structure of bank flows, disaggregating by banking centers. The main findings are that spillovers caused by banks’ exposures to a crisis country help predict flows in third countries after the Mexican and Asian crises, but not after the Russian crisis. In the latter, there is evidence of a generalized outflow from emerging markets. The importance of spillovers through banking centers suggests that countries might reduce contagion risk by diversifying the sources of their financing and by carefully monitoring borrowing from creditors exposed to potential crisis countries.

Extreme Contagion in Equity Markets

Contagion can be defined as the probability of observing large return realizations simultaneously across different financial markets (co-exceedances) rather than as increases in correlations. We introduce global extreme contagion measures constructed from bivariate extremal dependence measures. The measures are used to quantify both negative and positive equity returns contagion at the inter- and intraregional level for a number of mature and emerging equity markets during the past decade. Our results suggest that (a) contagion patterns differ significantly within regions and across regions, with Latin America showing a secular increase in contagion not matched by other regions or countries; (b) contagion is higher for negative returns than for positive returns; (c) only the 1998 Russian and Brazilian crises led to a global increase in contagion; and (d) extremal dependence measures of contagion and simple correlation measures are not highly correlated, with the exception of Latin America, suggesting that the use of correlations as a proxy for contagion may be misleading.

Fatal Attraction: A New Measure of Contagion

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 but in a departure from previous practice it 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.

Fatal Attraction: A New Measure of Contagion

Fatal Attraction: A New Measure of Contagion

Measurement of Contagion in Banks' Equity Prices

This paper uses the co-incidence of extreme shocks to banks' risk to examine within country and across country contagion among large EU banks. Banks' risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify systematically important banks in the EU.

Contagion and causality: an empirical investigation of four Asian crisis episodes

Our study extends on conventional measures of contagion by directly investigating changes in the existence and the directions of causality. In particular, we apply a Granger-causality methodology on sovereign bond spreads as a measure of perceived country risk. For the Asian crisis, we find evidence for new and changed causality patterns on a regional level. With the arrival of the Russian crisis, causality patterns were changing not only on a regional but also on a global level.

Extreme Contagion in Equity Markets

This study uses bivariate extremal dependence measures, based on the number of equity return co-exceedances in two markets, to quantify both negative and positive equity returns contagion in mature and emerging equity markets during the past decade. The results indicate (a) higher contagion for negative returns than for positive returns; (b) a secular increase in contagion in Latin America not matched in other regions; (c) global increases in contagion following the 1998 financial crises; and (d) that the use of simple correlations as a proxy for contagion could be misleading, as the former exhibit low correlation with extremal dependence measures of contagion.

Facial mimicry and emotional contagion to dynamic emotional facial expressions and their influence on decoding accuracy

The present study had the goal to assess whether individuals mimic and show emotional contagion in response to relatively weak and idiosyncratic dynamic facial expressions of emotions similar to those encountered in everyday life. Furthermore, the question of whether mimicry leads to emotional contagion and in turn facilitates emotion recognition was addressed. Forty-one female participants rated a series of short video clips of stimulus persons expressing anger, sadness, disgust, and happiness regarding the emotions expressed. An unobtrusive measure of emotional contagion was taken. Evidence for mimicry was found for all types of expressions. Furthermore, evidence for emotional contagion of happiness and sadness was found. Mediational analyses could not confirm any relation between mimicry and emotional contagion nor between mimicry and emotion recognition.

Contagion and Causality: An Empirical Investigation of Four Asian Crisis Episodes

Our study extends on conventional measures of contagion defined as a marked increase of cross-market correlation by directly investigating changing causality pattern by using the Granger-causality methodology. Our results show that the Asian crisis first established new and changed causality patterns that were not present before the crises on a regional base. Moreover, in some cases it even appeared that in the post-crisis period formerly unrelated markets became co-integrated, pointing to a changed perception of emerging country risk. Furthermore, it is shown that while the initial impact of the Asian crisis appeared to be changing only the regional causality pattern the additional impact of the Russian crisis appeared to have changed the causality pattern in an even less predictable way crossing continents at random and thus pointing to the important role of international financial markets in regional and global financial contagion.