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Journal of Financial Econometrics Advance Access published online on March 8, 2007
Journal of Financial Econometrics, doi:10.1093/jjfinec/nbm003
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Copyright © The Author 2007. Published by Oxford University Press.

Measuring contagion and interdependence with a Bayesian time-varying coefficient model: an application to the Chilean FX market during the Argentine crisis

Matteo Ciccarelli
     European Central Bank

Alessandro Rebucci
     International Monetary Fund

Address correspondence to Matteo Ciccarelli, ECB DG Research, Kaiserstrasse 29, D-60311, Frankfurt am Main, or e-mail: matteo.ciccarelli{at}ecb.int


  Abstract

We use a Bayesian time-varying coefficient model to measure contagion and interdependence, and we apply it to the Chilean FX market during the 2001 Argentine crisis. The proposed framework works in the joint presence of heteroskedasticity and omitted variables, without knowledge of the crisis timing prior to the empirical analysis. It can distinguish between contagion and interdependence, as well as between unusually strong or weak market comovements. In a "natural" experiment based on our application, we find that the proposed framework works well in practice. In the application, we find evidence of some contagion from Argentina and some interdependence with Brazil.

KEYWORDS: Argentine crisis, Chile, contagion, interdependence, omitted variables, time-varying coefficient models

This is a revised version of our IVIE WP No. 03/20, ECB WP No. 263, IMF WP No. 03/171. For useful comments and suggestions, we are thankful to the editor (Rene’ Garcia) and three anonymous referees, Fabio Canova, Lorenzo Cappiello, Rodrigo Fuentes, Pablo Garcia, Tony Gravelle, Alejandro Justiniano, Laura Kodres, Eduardo Ley, Saul Lizondo, Simone Manganelli, Steve Phillips, Shu Wu, Jeronimo Zettelmeyer, and seminar participants at the following institutions and meetings: Central Bank of Chile, ECARES-University of Bruxelles, Ente Einaudi-Bank of Italy, IGIER-Bocconi University, University of Alicante, European Central Bank, International Monetary Fund, Queen Mary University of London, World Bank, 2002 Latin American Meeting of the Econometric Society, and 2003 North American Summer Meeting of the Econometric Society. Ciccarelli's research was done in part while he was at the University of Alicante with financial support from Ministerio de Ciencia y Tecnología (Project BEC2002-03097), Generalitat Valenciana (Project CTIDIB/2002/175), IVIE, and the IMF. This paper should not be reported as representing the views of the IMF or the ECB, IMF or ECB policy. Remaining errors are of the authors.

Received July 30, 2004; revised August 4, 2006; accepted November 8, 2006


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