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Contagion Effects of US Subprime Crisis on ASEAN-5 Stock Markets: Evidence from MGARCH-DCC Application

Listed author(s):
  • Chunxiu, Ma
  • Masih, Mansur

We attempted to investigate the contagion effects of the US subprime crisis on ASEAN-5 stock markets [including Malaysia (conventional and Islamic), Thailand, Singapore, Indonesia, Philippines] by applying MGARCH-DCC through the period of January 1, 2004 to July 5, 2012 on daily stock indices returns, and also Continuous Wavelet Transform coherence method through the period of January 1, 2006 to December 31, 20091 on daily stock indices returns. This is motivated by the fact that the 2007-2009 crises in the US mortgage market were transmitted to the rest of the world through cross-country banking linkages. This paper, to our best knowledge, is the first attempt to explore such issue for the ASEAN-5 markets (including Malaysia Islamic stock market) using the most recent econometric techniques. We found evidence that there were statistically significant contagion effects from the US sub-prime crisis to the ASEAN-5 countries and the contagion occurred probably around mid-2008. Our results tend to indicate consistent co-movement between most of the ASEAN-5 stock markets and the US stock market in the long run. We also uncovered evidence of a wide variation in co-movement across different timescales during the financial crisis. The Malaysia conventional stock market is found to be more contagious than its counterpart, the Malaysia Islamic stock market, and the latter is negatively correlated with the US stock market with a decreasing co-movement pattern even during the crisis period indicating policy implications for portfolio diversification.

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File URL: https://mpra.ub.uni-muenchen.de/57004/1/MPRA_paper_57004.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 57004.

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Date of creation: 29 Jun 2014
Handle: RePEc:pra:mprapa:57004
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  1. Anis Omri & Sonia Ghorbel-Zouari, 2011. "International financial contagion of the US sub-prime crisis: evidence through the adjusted correlation test and non-linear Error Correction Models (ECM)," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 4(2), pages 135-149.
  2. Gerlach, Stefan & Smets, Frank, 1995. "Contagious speculative attacks," European Journal of Political Economy, Elsevier, vol. 11(1), pages 45-63, March.
  3. Nabi, Mahmoud Sami, 2012. "Dual Banking and Financial Contagion," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 20, pages 29-54.
  4. Muller, Ulrich A. & Dacorogna, Michel M. & Dave, Rakhal D. & Olsen, Richard B. & Pictet, Olivier V. & von Weizsacker, Jacob E., 1997. "Volatilities of different time resolutions -- Analyzing the dynamics of market components," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 213-239, June.
  5. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
  6. Kim, Bong-Han & Kim, Seewon, 2013. "Transmission of the global financial crisis to Korea," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 339-353.
  7. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
  8. Paul Lynch & Gilles Zumbach, 2003. "Market heterogeneities and the causal structure of volatility," Quantitative Finance, Taylor & Francis Journals, vol. 3(4), pages 320-331.
  9. Kim, Bong-Han & Kim, Hyeongwoo & Lee, Bong-Soo, 2015. "Spillover effects of the U.S. financial crisis on financial markets in emerging Asian countries," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 192-210.
  10. Jessica James & Kristjan Kasikov & Kerry-Ann Edwards, 2012. "The end of diversification," Quantitative Finance, Taylor & Francis Journals, vol. 12(11), pages 1629-1636, November.
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