No Contagion, Only Interdependence: Measuring Stock Market Comovements


  • Kristin J. Forbes,

  • Roberto Rigobon

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    • Forbes and Rigobon are both from the Sloan School of Management at the Massachusetts Institute of Technology. Thanks to Rudiger Dornbusch; Richard Greene; Andrew Rose; Jaume Ventura; an anonymous referee; and seminar participants at Dartmouth, MIT, and NYU for helpful comments and suggestions.


Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred 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. There is a high level of market comovement in all periods, however, which we call interdependence.