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Testing for Financial Contagion between Developed and Emerging Markets during the 1997 East Asian Crisis

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Author Info
Philip Arestis
Guglielmo Maria Caporale
Andrea Cipollini

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Abstract

This paper examines whether, during the 1997 East Asian crisis, there was any contagion from the four largest economies in the region (Thailand, Indonesia, Korea, and Malaysia) to a number of developed countries (Japan, the United States, the United Kingdom, Germany, and France). Following Forbes and Rigobon (2002) and Rigobon (2003), we test for contagion as a positive significant shift in the degree of comovement between asset returns, taking into account heteroscedasticity and endogeneity bias. However, we improve on earlier empirical studies by taking the approach introduced by Caporale et al. (2002), and employ a full sample test of the stability of the system that relies on more plausible (over)identifying restrictions. The estimation results show that the impact of the East Asian crisis on developed financial markets was small (Japan being the only exception), while the drastic reduction in international lending to the region severely affected it.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number 370.

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Date of creation: Jan 2003
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Handle: RePEc:lev:wrkpap:370

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  3. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, vol. 102(2), pages 143-164, June. [Downloadable!] (restricted)
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  4. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  5. Mardi Dungey & Renee Fry & Vance Martin & Brenda González-Hermosillo, 2004. "Empirical Modeling of Contagion: A Review of Methodologies," IMF Working Papers 04/78, International Monetary Fund. [Downloadable!]
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  6. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 5-33. [Downloadable!] (restricted)
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  7. Rigobon, Roberto, 2003. "On the measurement of the international propagation of shocks: is the transmission stable?," Journal of International Economics, Elsevier, vol. 61(2), pages 261-283, December. [Downloadable!] (restricted)
  8. Michel Normandin & Louis Phaneuf, 1996. "The Liquidity Effect: Testing Identification Conditions Under Time-Varying Conditional Volatility," Econometrics 9607001, EconWPA. [Downloadable!]
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  9. Mardi Dungey & Diana Zhumabekova, 2001. "Testing for contagion using correlations: some words of caution," Pacific Basin Working Paper Series 01-09, Federal Reserve Bank of San Francisco. [Downloadable!]
  10. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Taimur Baig & Ilan Goldfajn, 1998. "Financial Market Contagion in the Asian Crisis," IMF Working Papers 98/155, International Monetary Fund.
  12. Reinhart, Carmen & Kaminsky, Graciela, 2001. "Bank Lending and Contagion: Evidence from the Asian Crisis," MPRA Paper 7580, University Library of Munich, Germany. [Downloadable!]
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  13. Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
  14. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, 09. [Downloadable!] (restricted)
  15. Larry Neal & Marc Weidenmier, 2002. "Crises in the Global Economy from Tulips to Today: Contagion and Consequences," NBER Working Papers 9147, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Tim Bollerslev & Jeffrey Wooldridge, 1992. "Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances," Econometric Reviews, Taylor and Francis Journals, vol. 11(2), pages 143-172. [Downloadable!] (restricted)
  17. Michael D. Bordo & Antu P. Murshid, 2000. "Are Financial Crises Becoming Increasingly More Contagious? What is the Historical Evidence on Contagion?," NBER Working Papers 7900, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. Carlo A. Favero & Francesco Giavazzi, 2000. "Looking for Contagion: Evidence from the ERM," NBER Working Papers 7797, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  20. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," World Bank Research Observer, Oxford University Press, vol. 15(2), pages 177-97, August.
  21. Favero, Carlo A & Giavazzi, Francesco, 2000. "Looking for Contagion: the Evidence from the ERM," CEPR Discussion Papers 2591, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  22. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Blackwell Publishing, vol. 17(4), pages 571-608, 09. [Downloadable!] (restricted)
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  23. Caporale, Guglielmo Maria & Cipollini, Andrea & Spagnolo, Nicola, 2005. "Testing for contagion: a conditional correlation analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 476-489, June. [Downloadable!] (restricted)
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