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Unobservable Shocks as Carriers of Contagion: A Dynamic Analysis Using Identified Structural GARCH

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Author Info

  • Mardi Dungey

    ()
    (Univeristy of Cambridge)

  • George Milunovich

    ()
    (Macquarie University)

  • Susan Thorp

    ()
    (University of Technology, Sydney)

Abstract

Markets in financial crisis may experience heightened sensitivity to news from abroad and they may also spread turbulence into foreign markets, creating contagion. We use a structural GARCH model to separate and measure these two parts of crisis transmission. Unobservable structural shocks are named and linked to source markets using variance decompositions, allowing clearer interpretation of impulse response functions. Applying this method to data from the Asian crisis, we find signifcant contagion from Hong Kong to nearby markets but little heightened sensitivity. Impulse response functions for an equally-weighted equity portfolio show the increasing dominance of Korean and Hong Kong shocks during the crisis, whereas Indonesia\'s infuence shrinks.

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Bibliographic Info

Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 22.

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Length: 26
Date of creation: 25 Feb 2008
Date of revision:
Handle: RePEc:qut:auncer:2008-11

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Keywords: Contagion; Structural GARCH;

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References

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  1. Taimur Baig & Ilan Goldfajn, 1999. "Financial Market Contagion in the Asian Crisis," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 3.
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Citations

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Cited by:
  1. Baur, Dirk G., 2012. "Financial contagion and the real economy," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2680-2692.
  2. Flavin, Thomas J. & Panopoulou, Ekaterini & Unalmis, Deren, 2008. "On the stability of domestic financial market linkages in the presence of time-varying volatility," Emerging Markets Review, Elsevier, vol. 9(4), pages 280-301, December.
  3. Weber, Enzo, 2009. "Financial Contagion, Vulnerability and Information Flow: Empirical Identification," University of Regensburg Working Papers in Business, Economics and Management Information Systems 431, University of Regensburg, Department of Economics.

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