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Dynamic Correlation Analysis of Financial Spillover to Asian and Latin American Markets in Global Financial Turmoil

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Author Info

  • Matthew S. Yiu

    (Research Department, Hong Kong Monetary Authority)

  • Wai-Yip Alex Ho

    (Research Department, Hong Kong Monetary Authority)

  • Lu Jin

    (Research Department, Hong Kong Monetary Authority)

Abstract

This paper investigates the spillover of financial crises by studying the dynamics of correlation between eleven Asian and six Latin American stock markets vis-¨¤-vis the US stock market. A regional factor that drives common movements of stock markets in each region is identified for the period from 1993 to early 2009. We then estimate the time-varying volatility correlation between the regional factor and the US stock market by an asymmetric dynamic conditional correlation model. We find that there is a significant rise in the estimated time-varying correlation in the period from August 2007 to March 2009, suggesting evidence of contagion from the US stock market to markets in the two regions during the global financial turmoil. The magnitude of the contagion effect to both regions in the global financial crisis is very similar, albeit their different economic, political and institutional characteristics. On the other hand, we find no evidence of having contagion from the US to the Asian region during the Asian financial crisis in 1997 and 1998 as expected, since the crisis was originated locally.

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File URL: http://www.hkma.gov.hk/media/eng/publication-and-research/research/working-papers/HKMAWP10_01_full.pdf
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Bibliographic Info

Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 1001.

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Length: 22 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:hkg:wpaper:1001

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Keywords: Principal Component; Financial Contagion; Financial Crisis; Dynamic Conditional Correlation; Asia Pacific Economies; Latin American Economies;

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References

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  1. Yin-Wong Cheung & Matthew S. Yiu & Kenneth K. Chow, 2009. "A Factor Analysis of Trade Integration: the Case of Asian and Oceanic Economies," Economie Internationale, CEPII research center, issue 119, pages 5-23.
  2. Y.L. Cheung & Y.W. Cheung & K.C. Ng, 2003. "East Asian Equity Markets, Financial Crises, and the Japanese Currency," Working Papers 032003, Hong Kong Institute for Monetary Research.
  3. Chiang, Thomas C. & Jeon, Bang Nam & Li, Huimin, 2007. "Dynamic correlation analysis of financial contagion: Evidence from Asian markets," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1206-1228, November.
  4. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
  5. Diamandis, Panayiotis F., 2009. "International stock market linkages: Evidence from Latin America," Global Finance Journal, Elsevier, vol. 20(1), pages 13-30.
  6. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
  7. Sheng-Yung Yang, 2005. "A DCC analysis of international stock market correlations: the role of Japan on the Asian Four Tigers," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(2), pages 89-93, March.
  8. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
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Cited by:
  1. Lu Yang & Shigeyuki Hamori, 2013. "EU Accession, Financial Integration, and Contagion Effects: Dynamic Correlation Analysis of CEEC-3 Bond Markets," Transition Studies Review, Springer, vol. 20(2), pages 179-189, October.
  2. Ahmad, Wasim & Sehgal, Sanjay & Bhanumurthy, N.R., 2013. "Eurozone crisis and BRIICKS stock markets: Contagion or market interdependence?," Economic Modelling, Elsevier, vol. 33(C), pages 209-225.
  3. Toyoshima, Yuki & Tamakoshi, Go & Hamori, Shigeyuki, 2012. "Asymmetric dynamics in correlations of treasury and swap markets: Evidence from the US market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 381-394.

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