Sampling Properties of Contagion Tests

The finite sample properties of recent tests of contagion are investigated using a range of Monte Carlo experiments. Some variations of these tests are also investigated to correct for size distortions and weak instrument problems. The finite sample results show that the Forbes-Rigobon and Pesaran-Pick tests are conservative tests, while the Favero-Giavazzi and Bae-Karolyi-Stulz tests are oversized. Two proposed variants of the Forbes and Rigobon test are shown to improve upon the sampling properties of this test. The change in the correlation test is shown to be a non-monotonic function of the strength of contagion resulting in non-monotonic power functions.

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