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

  • Mardi Dungey

    ()

    (Univeristy of Cambridge)

  • George Milunovich

    ()

    (Macquarie University)

  • Susan Thorp

    ()

    (University of Technology, Sydney)

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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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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  7. Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, vol. 57(1), pages 231-246, June.
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  16. Shaun Bond & Mardi Dungey & Renée Fry, 2006. "A Web Of Shocks: Crises Across Asian Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 253-274, May.
  17. Anna Pavlova & Roberto Rigobon, 2008. "The Role of Portfolio Constraints in the International Propagation of Shocks," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1215-1256.
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