Pure Contagion and Investors` Shifting Risk Appetite: Analytical Issues and Empirical Evidence

Kumar, Manmohan; Persaud, Avinash

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Pure Contagion and Investors` Shifting Risk Appetite: Analytical Issues and Empirical Evidence

IMF Working Paper No. 01/134

35 Pages Posted: 31 Jan 2006

See all articles by Manmohan Kumar

Manmohan Kumar

International Monetary Fund (IMF) - Research Department

Avinash Persaud

GAM Fund Management Limited

Date Written: September 2001

Abstract

This paper discusses a pure form of financial contagion, unrelated to economic fundamentals - investors' shifting appetite for risk. It provides an analytical framework for identifying changes in investors' risk appetite and discusses whether it is possible to directly measure them in a way that can enable policy makers to differentiate between financial contagion and domestic fundamentals as the immediate source of a crisis. Daily measures of risk appetite are computed and their usefulness in predicting financial crises is assessed.

Keywords: Risk aversion, contagion affects, financial crises

JEL Classification: F31, F32, G20, G33

Suggested Citation: Suggested Citation

Kumar, Manmohan and Persaud, Avinash, Pure Contagion and Investors` Shifting Risk Appetite: Analytical Issues and Empirical Evidence (September 2001). IMF Working Paper No. 01/134, Available at SSRN: https://ssrn.com/abstract=879914