Dimitrios Asteriou Dr, Ph.D, Department of Economics, City University, Northampton Square, London, EC1V 0HB, United Kingdom, Aristeidis Samitas Dr., Ph.D., Business School, University of the Aegean, 8, Michalon street, Chios, 82100, Greece, and Dimitris Kenourgios Dr., PhD, Department of Economics, University of Athens, 5 Stadiou street, Athens, 10562, Greece.
This paper investigates financial contagion on two asset markets, the equity and the foreign exchange markets, using data collected from four countries (Indonesia, Korea, Malaysia and Thailand), affected by the Asian crisis in 1997. In our analysis, we split our data into two sub sampling periods, the tranquil period (from 03 Jan. 1995 to 30 June 1997) and the crisis period (from 01 July 1995 to 31 Aug. 1998). We detect a significant rise in the linear relationship and increase in comovement in market returns once the crisis started. In VAR modeling process, we provide strong evidence that some equity return series Granger causes others; the impulse response functions show shocks originated from individual countries sometimes have significant impact on other countries; and variance decompositions show some markets contribute significant component shocks to others. In the multivariate GARCH model applied, we found cross sectional relationship between different equity markets for asymmetric volatility spillovers and transmissions. Finally, we found in our estimated univariate TGARCH model that the leverage effects are positive and statistically significant for all markets, indicating evidence of volatility clustering and asymmetric volatility spillover.
Keywords: Asian financial crisis; contagion; equity and foreign exchange markets; GARCH models.
JEL classification: F30, G15