BoE paper finds fault with empirical methods for studying contagion
Review of spillover and contagion literature finds methods plagued by bias and heteroskedasticity
The empirical literature suffers from major issues when seeking to study contagion, according to a staff working paper published by the Bank of England on August 11.
Roberto Rigobon points out due to the specific nature of contagion, all standard models suffer from an awkward combination of misspecification and heteroskedasticity, which leads to time-varying biases.
"In consequence, correlations, principal components, OLS regressions, event studies, VAR's, Arch and Garch models, Probit and Logit
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