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SUMMARYAn empirical model of multiple asset classes across countries is formulated in a latent factor framework. A special feature of the model is that financial market linkages during periods of financial crises, including spillover and contagion effects, are formally specified. The model also captures a range of common factors including global shocks, country and market shocks, and idiosyncratic shocks. The framework is applied to modelling linkages between currency and equity markets during the East Asian financial crisis of 1997-98. The results provide strong evidence that cross-market links are important. Spillovers have a relatively larger effect on volatility than contagion, but both are statistically significant.

SUMMARYA factor analysis of long-term bond spreads is performed by decomposing international interest rate spreads into national and global factors. The factors are latent, and are assumed to have GARCH-type speci®cations as well as exhibiting serial dependence. An indirect estimator is used to compute estimates of the unknown parameters. The sampling performance of this estimator is investigated and compared with an alternative direct estimator based on the Kalman predictor. The factor model is applied to weekly data on long-bond spreads between ®ve countries Ð Australia, Japan, Germany, Canada and the UK Ð and the USA over the period 1991 to 1999. The resulting factor decomposition is used to examine the international investor's optimal portfolio decision in a mean-variance framework.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The existing literature suggests a number of alternative methods to test for the presence of contagion during financial market crises. This paper reviews those methods and shows how they are related in a unified framework. A number of extensions are also suggested that allow for multivariate testing, endogeneity issues, and structural breaks.