Some critics to the contagion correlation test

Abstract

The term contagion is generally used to refer to the spread3 of market shocks from one country to another. However, identifying what is meant by contagion and its consequences has become in recent years a literature in itself4, given the importance of such consequences on economies all over the world. Despite the lack of theoretical consensus, some authors try to measure contagion through the use of correlation tests. The aim of my work is to raise a technical and conceptual critique concerning these models. To support my concerns I provide a broad vision and background of contagion literature and an insight in the particular field of contagion correlation test. The work is organized in four parts. Firstly, an overview of definitional issues concerning contagion, as presented in the literature, is explained together with the different crisis transmission channels that authors have identified. Secondly, a detailed description of the contagion correlation test –as the most common means to search for contagion—is presented, giving a full overview of the models used in the literature. Thirdly, I will express my concerns about the test and the models of the previous section. Finally, some conclusions are stated.