Bridge over ocean
1 January 2002 Financial Analysts Journal Volume 58, Issue 1

Financial Contagion and International Portfolio Flows

  1. Anne-Sophie Van Royen

Financial contagion is an issue of interest to policymakers and portfolio managers. In the presence of contagion, the benefits of geographical diversification may be overstated. Contagion is defined independently of changes in macroeconomic fundamentals. It corresponds to a situation in which shocks in one country spread to another country in a significantly more pronounced manner than during quiet times. In the study reported here, I attempted to measure contagion from daily cross-border portfolio flows. Using data from State Street Bank and Trust Company, I constructed three indexes for 1996 through 2000. I found little statistical evidence of contagion, but the weighted index that measured the “contagiousness” of flows reached its four-year low in August 1998, suggesting that the Russian crisis was characterized by both contagion and large aggregate outflows. I also found that contagion appears to be regional and that the developed countries seem to be sheltered from contagion.

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