Advertisement

Eurasian Economic Review

, Volume 4, Issue 2, pp 133–162 | Cite as

Asset price volatility and financial contagion: analysis using the MS-VAR framework

  • Chau LeEmail author
  • Dickinson David
Original Paper

Abstract

This paper investigates volatility linkages and financial contagion via the asset price channel from the US and Europe to East Asia during the 2007–2011 global financial crisis. Following crisis contingent theories, financial contagion is modeled as the structural change in transmission mechanism after a shock in one country (shift-contagion). Using Markov-switching vector autoregression and multivariate unconditional correlation tests, this study not only addresses the theoretical assumptions about multiple equilibria and nonlinear linkages, but also handles the problems of heteroskedasticity, endogeneity, simultaneous equations and sample selection bias. The empirical results show a significant nonlinear dynamic behaviour of asset returns and volatility interactions across-countries. The volatility spillovers from the US and Europe to East Asian financial markets were mainly caused by fundamental links, apart from in Thailand, which experienced shift-contagion caused by investor behaviours. There is also evidence of the intensified intra-regional linkages in the event of an external shock.

Keywords

Financial crisis Financial contagion Asset pricing Volatility linkages 

JEL Classification

G01 G02 G12 G13 

References

  1. Aragó-Manzana, V., & Fernández-Izquierdo, M. Á. (2007). Influence of structural changes in transmission of information between stock markets: a European empirical study. Journal of Multinational Financial Management, 17(2), 112–124.CrossRefGoogle Scholar
  2. Artikis, P., & Nifora, G. (2011). The industry effect on the relationship between leverage and returns. Eurasian Business Review, 1(2), 125–144.Google Scholar
  3. Baig, T., & Goldfajn, I. (1998). Financial market contagion in the Asian crisis.Google Scholar
  4. Calvo, G. A., & Mendoza, E. G. (2000). Rational contagion and the globalization of securities markets. Journal of International Economics, 51(1), 79–113.CrossRefGoogle Scholar
  5. Caramazza, F., Ricci, L.A., & Salgado, R. (2000). Trade and financial contagion in currency crises. International Monetary Fund.Google Scholar
  6. Chancharoenchai, K., & Dibooglu, S. (2006). Volatility spillovers and contagion during the Asian crisis: evidence from six Southeast Asian stock markets. Emerging Markets Finance and Trade, 42(2), 4–17.CrossRefGoogle Scholar
  7. Claessens, S., & Forbes, K. (2004). International financial contagion: the theory. Paper presented at the Evidence and Policy Implications/Conference ‘The IMFs Role in Emerging Market Economies: Reassessing the Adequacy of its Resources’ organized by RBWC, DNB and WEF in Amsterdam on November.Google Scholar
  8. Corsetti, G., Pericoli, M., & Sbracia, M. (2005). ‘Some contagion, some interdependence’: more pitfalls in tests of financial contagion. Journal of International Money and Finance, 24(8), 1177–1199.CrossRefGoogle Scholar
  9. Diamond, D.W., & Dybvig, P.H. (1983). Bank runs, deposit insurance, and liquidity. The Journal of Political Economy, 401–419.Google Scholar
  10. Dungey, M., Fry, R., González-Hermosillo, B., & Martin, V. L. (2005). Empirical modelling of contagion: a review of methodologies. Quantitative Finance, 5(1), 9–24.CrossRefGoogle Scholar
  11. Edwards, S. (1998). Openness, productivity and growth: what do we really know? The Economic Journal, 108(447), 383–398.CrossRefGoogle Scholar
  12. Eichengreen, B., Rose, A.K., & Wyplosz, C. (1996). Contagious currency crises. National Bureau of Economic Research.Google Scholar
  13. Feng, X., Hu, H., & Wang, X. (2010). The evolutionary synchronization of the exchange rate system in. Physica A: Statistical Mechanics and its Applications, 389(24), 5785–5793.CrossRefGoogle Scholar
  14. Filardo, A., George, J., Loretan, M., Ma, G., Munro, A., Shim, I., Zhu, H. (2010). The international financial crisis: timeline, impact and policy responses in Asia and the Pacific. BIS Papers, 52, 21–82.Google Scholar
  15. Forbes, K.J., & Rigobon, R. (2001). Measuring contagion: conceptual and empirical issues. International Financial Contagion, 43–66. (Springer).Google Scholar
  16. Forbes, K. J., & Rigobon, R. (2002). No contagion, only interdependence: measuring stock market comovements. The Journal of Finance, 57(5), 2223–2261.CrossRefGoogle Scholar
  17. Gerlach, S., & Smets, F. (1995). Contagious speculative attacks. European Journal of Political Economy, 11(1), 45–63.CrossRefGoogle Scholar
  18. Guo, K., & Stepanyan, V. (2011). Determinants of bank credit in emerging market economies. IMF Working Papers, 1–20.Google Scholar
  19. Haile, F., & Pozo, S. (2008). Currency crisis contagion and the identification of transmission channels. International Review of Economics and Finance, 17(4), 572–588.CrossRefGoogle Scholar
  20. Hamao, Y., Masulis, R. W., & Ng, V. (1990). Correlations in price changes and volatility across international stock markets. Review of Financial studies, 3(2), 281–307.CrossRefGoogle Scholar
  21. Hamilton, J.D. (1989). A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica: Journal of the Econometric Society, 357–384.Google Scholar
  22. Hamilton, J.D. (2008). Regime-switching models. The New Palgrave Dictionary of Economics, 2.Google Scholar
  23. Ismail, M. T., & Rahman, R. A. (2009). Modelling the relationships between US and selected Asian stock markets. World Applied Sciences Journal, 7(11), 1412–1418.Google Scholar
  24. Kindleberger, C.P., & Aliber, R.Z. (2011). Manias, panics and crashes: a history of financial crises: Palgrave Macmillan.Google Scholar
  25. King, M. A., & Wadhwani, S. (1990). Transmission of volatility between stock markets. Review of Financial Studies, 3(1), 5–33.CrossRefGoogle Scholar
  26. Krolzig, H.-M. (1998). Econometric modelling of Markov-switching vector autoregressions using MSVAR for Ox.Google Scholar
  27. Kumar, M. S., & Persaud, A. (2002). Pure contagion and investors’ shifting risk appetite: analytical issues and empirical evidence. International Finance, 5(3), 401–436.CrossRefGoogle Scholar
  28. Lian, Y., Sepehri, M., & Foley, M. (2011). Corporate cash holdings and financial crisis: an empirical study of Chinese companies. Eurasian Business Review, 1(2), 112–124.Google Scholar
  29. Maghrebi, N., Holmes, M. J., & Pentecost, E. J. (2006). Are there asymmetries in the relationship between exchange rate fluctuations and stock market volatility in Pacific Basin countries? Review of Pacific Basin Financial Markets and Policies, 9(02), 229–256.CrossRefGoogle Scholar
  30. Mandilaras, A., & Bird, G. (2010). A Markov switching analysis of contagion in the EMS. Journal of International Money and Finance, 29(6), 1062–1075.CrossRefGoogle Scholar
  31. Masson, P.R. (1999). Multiple equilibria, contagion, and the emerging market crises. International Monetary Fund.Google Scholar
  32. Mullainathan, S. (2002). A memory-based model of bounded rationality. The Quarterly Journal of Economics, 117(3), 735–774.CrossRefGoogle Scholar
  33. Psaradakis, Z., & Spagnolo, N. (2003). On the determination of the number of regimes in Markov-switching autoregressive models. Journal of time series analysis, 24(2), 237–252.Google Scholar
  34. Rigobon, R. (2003). On the measurement of the international propagation of shocks: is the transmission stable? Journal of International Economics, 61(2), 261–283.CrossRefGoogle Scholar
  35. Tanai, Y., & Lin, K.-P. (2013). Mongolian and World Equity Markets: Volatilities and Correlations. Eurasian Economic Review, 3(2), 136–164.Google Scholar
  36. Wang, P., & Moore, T. (2012). The integration of the credit default swap markets during the US subprime crisis: dynamic correlation analysis. Journal of International Financial Markets Institutions and Money, 22(1), 1–15.CrossRefGoogle Scholar

Copyright information

© Eurasia Business and Economics Society 2014

Authors and Affiliations

  1. 1.Banking University HCMCHo Chi Minh CityVietnam
  2. 2.Department of EconomicsUniversity of BirminghamBirminghamUK

Personalised recommendations