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Testing for contagion in ASEAN exchange rates

  • McAleer, Michael
  • Nam, Jason Chee Wei

The Asian financial crisis in 1997 brought to the attention of member countries of the Association of South East Asian Countries (ASEAN-5) (comprising Indonesia, Malaysia, the Philippines, Singapore and Thailand) the need for closer monetary co-operation. Central to the OCA literature is the nature and symmetry of underlying economic disturbances. If the economic disturbances are similar across the countries in a region, then the costs of establishing a common currency area are likely to be small. As the presence of contagion necessarily means there is an increase in the correlation of shocks experienced within a region, this paper examines the suitability of establishing a common currency area for ASEAN-5 from the perspective of contagion. In order to select the breakpoints for contagion endogenously, a modified sequential dummy variable method is developed. The empirical results show that contagion is present between all country pairs in ASEAN-5, which indicates that the degree of correlation among the ASEAN-5 economies has increased during the Asian financial crisis.

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File URL: http://www.sciencedirect.com/science/article/pii/S037847540500039X
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Article provided by Elsevier in its journal Mathematics and Computers in Simulation (MATCOM).

Volume (Year): 68 (2005)
Issue (Month): 5 ()
Pages: 517-525

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Handle: RePEc:eee:matcom:v:68:y:2005:i:5:p:517-525
DOI: 10.1016/j.matcom.2005.02.008
Contact details of provider: Web page: http://www.journals.elsevier.com/mathematics-and-computers-in-simulation/

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  1. Mardi Dungey & Diana Zhumabekova, 2001. "Testing for contagion using correlations: some words of caution," Pacific Basin Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
  2. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  3. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, vol. 21(01), pages 232-261, February.
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