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No contagion, only interdependence : measuring stock market comovoments

Heteroskedasticity biases tests for contagion based on correlation coeficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occured 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..Printed Journal

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