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An Empirical Validation of Financial Contagion by A Multivariate VAR Model

Author

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  • Dr. Islem BOUTABBA

    (Department of Finance, Shaqra University, KSA)

Abstract

Financial contagion was first introduced in July 1997 when there was a crisis in Thailand’s exchange market that quickly spread to many other East Asian markets. Our empirical study thus aims at finding evidence of financial contagion between exchange markets, monetary markets, and stock markets in seven countries. Like Primiceri (2005) and Koop and Korobilis (2010), we use the VAR model to detect contagion between markets and intra-markets. We first study the correlations between the different markets of the same kind and then employ tests of the unitary root ADF and PP to determine the offset to be used in the VAR model. Our study highlights the presence of contagion between these markets (intra-market contagion) and contagion in the same market across countries (inter-market contagion). Moreover, we find that contagion largely explains anomalies in markets contrary to conventional finance. However, behavioral finance is still unable to predict future events.

Suggested Citation

  • Dr. Islem BOUTABBA, 2019. "An Empirical Validation of Financial Contagion by A Multivariate VAR Model," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(2), pages 221-244, September.
    • Handle: RePEc:ijb:journl:v:18:y:2019:i:2:p:221-244
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    References listed on IDEAS

    as
    1. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    2. Khalid, Ahmed M. & Kawai, Masahiro, 2003. "Was financial market contagion the source of economic crisis in Asia?: Evidence using a multivariate VAR model," Journal of Asian Economics, Elsevier, vol. 14(1), pages 131-156, February.
    3. Veysov, Alexander, 2012. "Financial Contagion and Systemic Risk: From Theory to Applicable Macroeconomic Model," MPRA Paper 40612, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financial Contagion ; Behavioral Finance; Financial Markets; Monetary Markets; Stock Markets ; Exchange Markets; VAR Model.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance

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