A Multicountry Measure of Comovement and Contagion in International Markets: Definition and Applications
19 May 2022 @ 3:00 pm - 4:30 pm
Online Research Seminar
3:00 pm, Thursday, 19 May 2022
This paper introduces a new measure of comovement and contagion of crises between countries, applies it to 16 world crises, including the current COVID-19 pandemic, and provides insights regarding the occurrence of contagion during these crises. Our measure demonstrates several important advantages over the extant measures of contagion. Traditional measures of contagion, such as increase in correlation, could be limited in scope since they are bivariate, whereas contagion is often a regional or global market phenomenon. The multiple comparisons that the binary correlations require in such cases could yield inconclusive or contradictory results and fail to capture the broad effects of the crisis on the regions. Moreover, during crises, a country’s stock market volatility often increases, a phenomenon that could lead to a spurious indication of increased correlation with other countries (contagion). Corrections for this bias have been suggested, but they could adversely affect the power of the contagion tests and fail to detect genuine contagion. Using simulations, we show the robustness of our measure to changes in volatility and demonstrate its power to affirm instances of genuine contagion. Support for the power of our measure relative to an extant leading measure of contagion is also provided by analysis of the cases of the 1994 Mexican peso crisis, the 1997 East Asian crisis, and Black Monday, the 1987 US stock market crash.
About the speaker
Itzhak Venezia is a Professor of Finance at the Academic College of Tel Aviv-Yaffo, the Chairman of the Finance Area for the MBA studies. He holds the Sanger Chair of Banking and Risk Management (emeritus) at the Hebrew University, Jerusalem, Israel where he taught before assuming his current position. Itzhak is on a sabbatical this academic year dividing his time between Tel Aviv University and Pompeu Fabra University in Barcelona. Professor Venezia is the editor in chief of the Lecture Notes Series in Finance, and the editor of the books: Behavioral Finance: Where do Investors Biases Come From? “Behavioral Finance: The Coming of Age”, and “Behavioral Finance: A Novel Approach”. He also authored the book” Lecture Notes in Behavioral Finance.” Itzhak has published numerous papers in leading journals such as the Journal of Finance, Journal of Economic Theory, Journal of Banking and Finance, Management Science, and is the joint editor of the book: Bridging the GAAP: Recent Advances in Accounting and Finance. He taught as a visiting professor at Yale University, The University of California, Los Angeles, Rutgers University, and Northwestern University. Professor Venezia’s research currently concentrates on Behavioral Finance, where he contributes profoundly to the better understanding of the disposition effect, herding, the differences in biases between amateurs and professionals, and other issues. Itzhak holds a Ph.D. from the University of California, Berkeley.