Unobservable Shocks as Carriers of Contagion: A Dynamic Analysis Using Identified Structural GARCH
AbstractMarkets 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 InfoPaper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 22.
Date of creation: 25 Feb 2008
Date of revision:
Contagion; Structural GARCH;
Find related papers by JEL classification:
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-21 (All new papers)
- NEP-ETS-2008-08-21 (Econometric Time Series)
- NEP-SEA-2008-08-21 (South East Asia)
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