The Effect of Data Dissemination Agreements on Financial Volatility and Contagion Open Access

Collett, Aaron Herawan (2011)

Permanent URL: https://etd.library.emory.edu/concern/etds/n870zr319?locale=en
Published

Abstract

The spillover of national financial crises between nations, or contagion, has risen in line with
increased global economic and financial interconnectedness. However, the recent history of
contagious crises show that patterns of contagion are often difficult to predict. Accordingly, this
study addresses the puzzle of unpredictable trends in contagion. The study tackles this general
puzzle by investigating how volatility can be spread between countries through an information
channel of contagion. Information contagion occurs when market participants make investment
decisions based on imperfect information. More specifically, the paper investigates if incidents
of information contagion can be lessened if governments improve their data provision practices.
In particular, the paper investigates the effect of subscription to the International Monetary
Fund's (IMF) Special Data Dissemination Standard (SDDS) on contagion. I hypothesize that
countries that provide better quality data and signal their commitment to this international
standard by joining the institution experience less contagion of financial volatility. This
relationship is tested in the paper in a multivariate regression of the effect of SDDS subscription
on domestic volatility and contagion. The test sample consists of 25 countries and uses daily data
from 1998 to 2009. The study offers the first empirical test of the relationship between the SDDS
and contagion. The findings confirm the paper's hypotheses and show that SDDS accession both
reduces domestic volatility and insulates nations from contagion of volatility, especially in times
of crisis.

Table of Contents

Table of Contents


I. Introduction


pg.1

II. Literature Review


4

a. Contagion

4

b. SDDS

11

III. Theory


24

a. Hypotheses

27

IV. Research Design


30

a. Dependent Variable

30

b. Independent Variable

33

c. Control Variables

35

V. Results

39

VI. Conclusion

47

VII. Appendices

52

VIII. Bibliography

56 Tables and Charts

Table 1 - Information Demands and SDDS Requirements

pg. 13

Chart 1 - SDDS Subscription by Year (Cumulative)

15

Chart 2 - SDDS Implementation by Year (Cumulative)

16

Chart 3 - SDDS Participants by Market Classification

17

Chart 4 - Regional Distribution of SDDS Participants

18

Table 2 - Data Provision Quality, full sample

23

Table 3 - Data Provision Quality, excluding advanced economies

24

Table 4 - Data Provision Quality, excluding advanced economies and LDCs

24

Table 5 - Subscribed v. Implemented (% by column)

34

Table 6 - Subscribed v. Implemented (% by row)

34

Table 7 - Subscribed v. Implemented (% of total observations)

34

Table 8 - XS-TR-CR Correlation

37

Table 9 - Preliminary Regression Tests

38

Table 10 - Fixed Effects Wald Tests

39

Chart 5 - LOWESS Fit Lines

40

Table 11 - Regression Results

41

Chart 6 - Contagion Trends by SDDS Status

43

Table 12 - Regression excluding Yj,t-1 > 5

44

Chart 7 - Domestic Volatility Relative to Accession

46

Chart 8 - Contagion Relative to Subscription

47

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