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The Determinants of Domestic and Cross Border Bank Contagion Risk in South East Asia

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Author Info

  • Carlos Bautista

    ()
    (College of Business Administration - University of the Philippines)

  • Philippe Rous

    ()
    (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)

  • Amine Tarazi

    ()
    (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)

Abstract

This paper addresses the issue of both domestic and cross border systemic risk for 8 countries in Southeast Asia (Hong Kong, Indonesia, Korea, Malaysia, The Philippines, Singapore, Taiwan and Thailand). We use weekly data on individual bank stock prices from 2000 to 2005 to construct bank contagion measures based on the exponential weighted average correlations of the residuals of the market model. Our results show that average pair-wise correlations significantly differ among countries and that the probability that a specific shock extends to other banks is better predicted by asset risk indicators and market based risk measures, such as systematic risk, for cross country contagion. In contrast, for domestic contagion, liquidity risk indicators and bank opaqueness proxies perform better. Our findings suggest that whereas illiquidity, but not insolvency, is a major concern at the domestic level the opposite result holds for cross country contagion.

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Paper provided by HAL in its series Working Papers with number hal-00918555.

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Date of creation: 2007
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Handle: RePEc:hal:wpaper:hal-00918555

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  1. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 145-168, June.
  2. Massimo Sbracia & Andrea Zaghini, 2003. "The Role of the Banking System in the International Transmission of Shocks," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 26(5), pages 727-754, 05.
  3. Bystrom, Hans N. E., 2004. "The market's view on the probability of banking sector failure: cross-country comparisons," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 14(5), pages 419-438, December.
  4. Reint Gropp & Jukka Vesala & Giuseppe Vulpes, 2004. "Market indicators, bank fragility, and indirect market discipline," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Sep, pages 53-62.
  5. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  6. Gropp, Reint & Moerman, Gerard, 2003. "Measurement of contagion in banks' equity prices," Working Paper Series, European Central Bank 0297, European Central Bank.
  7. Gianni De Nicoló & Myron L. Kwast, 2002. "Systemic Risk and Financial Consolidation," IMF Working Papers 02/55, International Monetary Fund.
  8. De Nicolo, Gianni & Kwast, Myron L., 2002. "Systemic risk and financial consolidation: Are they related?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(5), pages 861-880, May.
  9. Andrew Worthington & Helen Higgs, 2004. "Transmission of equity returns and volatility in Asian developed and emerging markets: a multivariate GARCH analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(1), pages 71-80.
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Cited by:
  1. Degryse, H.A. & Elahi, M.A. & Penas, M.F., 2009. "Cross-Border Exposures and Financial Contagion," Discussion Paper, Tilburg University, Center for Economic Research 2009-20, Tilburg University, Center for Economic Research.
  2. Carlos Bautista & Philippe Rous & Amine Tarazi, 2009. "The determinants of bank stock return's co-movements in East Asia," Economics Bulletin, AccessEcon, vol. 29(3), pages 1596-1601.

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