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High-Frequency Contagion Between the Exchange Rates and Stock Prices

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  • Yuko Hashimoto
  • Takatoshi Ito

Abstract

This paper analyzes the co-movement of the exchange rates and the stock prices from the viewpoint of contagion among the eight countries in the region during the period of Asian currency crisis, 1997-1999. Ito and Hashimoto (2002; NBER working paper) proposed a new definition of high-frequency contagion using daily exchange rate data. This paper extends the idea to include the stock market origins that are separately identified for the exchange rate and the stock price. Then contagion is defined not only among the exchange rates and stock prices separately, but also between an exchange rate and a stock price of the same country or of different countries. One of the motivations is the following observation. Hong Kong successfully defended the peg to the U.S. dollar throughout the Asian currency crisis period. However, the Hong Kong stock market was affected by the decline in currencies of neighboring countries most notably in October 1997. We use a friction model and a Tobit model to analyze the impact of a negative shock in one asset price to others. The difference between mildly-affected countries and severely-affected countries is analyzed; categories of large declines in the exchange rates (or stock prices) are made differentiated; and whether the stock prices were increasing or decreasing is distinguished. It is found, among others, that there was, in general the contagion between the exchange rates and stock prices; that the stock prices in Hong Kong were found to suffer from contagious effects from the decline in the Asian currencies; and that Indonesian, Korean and Thai currency depreciation and Hong Kong stock price declines had impacts on other currencies and stock prices in the region during the crisis period.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10448.

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Date of creation: Apr 2004
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Publication status: published as Dungey, Mardi and Demosthenes N.Tambakis (eds.) Identifying International Financial Contagion: Progress and Challenges CERF Finance and the Economy series. Oxford and New York: Oxford University Press, 2005.
Handle: RePEc:nbr:nberwo:10448

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  1. Otker, Inci & Pazarbasioglu, Ceyla, 1997. "Speculative attacks and macroeconomic fundamentals: evidence from some European currencies," European Economic Review, Elsevier, vol. 41(3-5), pages 847-860, April.
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  13. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  14. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
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Cited by:
  1. Viviana Fernández, 2006. "Extremal dependence in European capital markets," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 275-293, November.
  2. Cheung, Yan-Leung & Cheung, Yin-Wong & Ng, Chris C., 2007. "East Asian equity markets, financial crises, and the Japanese currency," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 138-152, March.

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