CONTAGION

Excess correlation of equity or bond returns. For example, under usual conditions we might observe a certain level of correlation of market returns . A period of contagion would be associated with much higher than expected correlation. Some examples might be the conjectured contagion in East Asian markets beginning in July 1997 when the Thai currency devalued or the impact across many emerging markets to the Russian default. Contagion is difficult to identify because you need some sort of measure of the expected correlation. It is complicated because correlations are known to change through time, for example, see Erb, Harvey and Viskanta's article in the 1994 Financial Analysts Journal. In periods of negative returns, correlations (and volatility ) is known to increase. So what might appear to be excessive may not be contagion.