Contagion and the Asian Currency Crisis

Abstract

This study attempts to examine relationships among exchange rates in the Asian region using cointegration methods and to isolate country-speci¢c e¡ects of contagion using an error correction model. Monthly data covering the period from July 1992 to December 1997 are used. Dynamic simulations of exchange rates with and without short-run e¡ects of exchange rate shocks are performed. The results indicate that stable long-run relationships exist among exchange rates in the region. Simulation results for some countries indicate that these countries' exchange rates would have depreciated in the long run even in the absence of the short-run e¡ects of potential contagion from other countries, while for other countries the opposite is true.

Cointegration and causality in the Asian and emerging foreign exchange markets: Evidence from the 1990s financial crises

“…The exchange rate series are the daily middle exchange rate (the average of the bid and ask rate) obtained from DataStream. Daily exchange rate data are used to test for cointegration as well as capturing the short-and long-term movement of the exchange rates (see Baig & Goldfajn, 1999;Caporale et al, 2000;Reside & Gochoco-Bautista, 1999).…”

“…Tests on the presence of contagion effects in currency crises include the cross-market correlation coefficient method (see Baig & Goldfajn, 1999;Park & Song, 2000), cointegration method (Reside & Gochoco-Bautista, 1999), Granger causality method (Khalid & Kawai, 2003;Sander & Kleimeier, 2003), and conditional probability of crisis method (see De Gregario & Valdes, 2001;Eichengreen, Rose, & Wyplosz, 1996).…”

“…For example, Reside and Gochoco-Bautista (1999) use an error correction model to examine the cointegration relationships among exchange rates in the Asian market to isolate country specific effects of contagion. The authors' results show stable long-run relationships between exchange rates in the region with contagion effects from other countries to Singapore, China, and Japan.…”

International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse

“…This is similar to concepts expressed in Favero and Giavazzi (2000) and Forbes andRigobon (1999, 2000). In contrast, studies such as Eichengreen, Rose and Wyplosz (1996) and Reside and Gochoco-Bautista (1999) base their view of contagion on the spillover effect of anticipated shocks across countries.…”

“…In the framework of the model of Section III, this would be captured in the long run relationships of the model. Reside and Gochoco-Bautista (1999) define contagion as the spillover effects of domestic disturbances on nearby or related economies, using lagged changes in the exchange rates as their contagion variable, while Goldstein, Kaminsky and Reinhart (2000) construct a contagion vulnerability index based on correlations between stock markets, trade linkages, presence of common markets and inter-linkages between banking systems. Van Rijckeghem and Weder (2001) construct a subjective binary variable to examine contagion effects due to financial and trade linkages.…”