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The Determinants of Domestic and Cross Border Bank Contagion Risk in Southeast Asia

  • Carlos Bautista
  • Philippe Rous
  • Amine Tarazi

This paper addresses the issue of both domestic and cross border systemic risk for 8 countries in Southeast Asia (Hong Kong, Indonesia, Korea, Malaysia, The Philippines, Singapore, Taiwan and Thailand). We use weekly data on individual bank stock prices from 2000 to 2005 to construct bank contagion measures based on the exponential weighted average correlations of the residuals of the market model. Our results show that average pair-wise correlations significantly differ among countries and that the probability that a specific shock extends to other banks is better explained by asset risk indicators and market based risk measures, such as systematic risk, for cross country contagion. In contrast, for domestic contagion, liquidity risk indicators and bank opaqueness proxies perform better. Our findings suggest that whereas illiquidity, but not insolvency, is a major concern at the domestic level the opposite result holds for cross country contagion.

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Article provided by Presses de Sciences-Po in its journal Revue économique.

Volume (Year): 59 (2008)
Issue (Month): 6 ()
Pages: 1215-1242

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Handle: RePEc:cai:recosp:reco_596_1215
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  1. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
  2. Helen Higgs & Andrew Worthington, 2004. "Transmission of returns and volatility in art markets: a multivariate GARCH analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 11(4), pages 217-222.
  3. Hans Byström, 2003. "The Market's View on the Probability of Banking Sector Failure: Cross-Country Comparisons," Research Paper Series 93, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Reint Gropp & Vesala Jukka & Giuseppe Vulpes, 2004. "Market Indicators, Bank Fragility, and Indirect Market Discipline," Finance 0411015, EconWPA.
  5. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  6. De Nicolo, Gianni & Kwast, Myron L., 2002. "Systemic risk and financial consolidation: Are they related?," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 861-880, May.
  7. Gropp, Reint & Moerman, Gerard, 2004. "Measurement of contagion in banks' equity prices," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 405-459, April.
  8. Gianni De Nicolo & Myron L. Kwast, 2002. "Systemic Risk and Financial Consolidation; Are they Related?," IMF Working Papers 02/55, International Monetary Fund.
  9. Massimo Sbracia & Andrea Zaghini, 2001. "Crises and contagion: the role of the banking system," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 241-260 Bank for International Settlements.
  10. Massimo Sbracia & Andrea Zaghini, 2001. "The Role of the Banking System in the International Transmission of Shocks," Temi di discussione (Economic working papers) 409, Bank of Italy, Economic Research and International Relations Area.
  11. Andrew Worthington & Helen Higgs, 2004. "Transmission of equity returns and volatility in Asian developed and emerging markets: a multivariate GARCH analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 71-80.
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