NBER WORKING PAPER SERIES

IDENTIFICATION THROUGH HETEROSKEDASTICITY:MEASURING “CONTAGION” BETWEEN ARGENTINEAN AND

MEXICAN SOVEREIGN BONDS

Roberto Rigobon

Working Paper 7493http://www.nber.org/papers/w7493

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138January 2000

I thank Brian Sack, Tom Stoker, and Mark Watson for helpful comments and suggestions. An earlier versionof the results of the paper were presented at the International Seminar at Princeton and the Finance Seminarat Ohio University. I thank the seminar participants for all their suggestions. All remaining errors are mine.The views expressed herein are those of the author and not necessarily those of the National Bureau ofEconomic Research.

© 2000 by Roberto Rigobon. All rights reserved. Short sections of text, not to exceed two paragraphs, maybe quoted without explicit permission provided that full credit, including © notice, is given to the source.

Identification through Heteroskedasticity: Measuring “Contagion” betweenArgentinean and Mexican Sovereign BondsRoberto RigobonNBER Working Paper No. 7493January 2000JEL No.C30, F32, C10

ABSTRACT

In this paper, I develop a new identification method to solve the problem of simultaneous equations,

based on heteroskedasticity of the structural shocks. I show that if the heteroskedasticity can be described

as a two-regime process, then the system is just identified under relatively weak conditions. Identification

is also discussed under more than two regimes, when the residuals exhibit ARCH behavior, and when there

are aggregate shocks.

This methodology is applied to measure contagion across sovereign bonds between Argentina and

Mexico. The estimates of the simultaneous parameters are relatively to different definitions of the regimes.

Roberto Rigobon Sloan School of Management, MIT E52-447 50 Memorial Cambridge, MA 02142-1347 and NBER rigobon@mit.edu