Dynamic correlation analysis of financial contagion in Asian markets in global financial turmoil

Abstract

This article investigates the dynamics of correlation between 11 Asian stock markets and the US stock market. By utilizing the method of 'principal components', we identify a single latent factor that can explain a major portion of variation in the weekly returns of these 11 markets from 1993 to early 2009. We employ the asymmetric Dynamic Conditional Correlation (DCC) model to estimate the correlation between this Asian factor and the US stock market. We find that there is a mean shift in the estimated DCC in the period from late of 2007. We refer this finding as contagion from the US to the Asian markets. However, we find no such evidence of having contagion between the US and individual markets in Asia during the Asian financial crisis.

Transmission of US financial and trade shocks to Asian economies: Implications for spillover of the 2007–2009 US financial crisis

“…Furthermore, during episodes of the recent US financial crisis, although the impact of the trade shock spillover to Asian economies was considerable, the size of financial shock spillover was also significant and greater than that. Therefore, our empirical finding from VAR analysis supports the empirical results reported by Chiang et al (2007) and Yiu et al (2010) based on use of a correlation approach.…”

“…The first argument is that US financial spillover is not great because financial sectors of Asian economies are not highly developed and because the level of internationalization is low. For example, according to Tille (2012) Yiu et al (2010), and Fujiwara and Takahashi (2012), in the stock and bond markets, the US and Asia have been closely interconnected. Moreover, interdependence in financial markets is a strengthening trend.…”

“…Consequently, Asian economies can not avoid the influence of US financial shocks. According to Chiang et al (2 007), Yiu et al (2010), and Fujiwara and Takahashi (2012), development of international linkages of stock and bond markets in recent years might account for the result. Second, because financial market integration has heretofore increased along with econo mic development, the US financial spillover becomes greater along with economic development.…”

“…Furthermore, Yiu et al (2010) investigate the dynamics of correlation between 11 Asian stock markets and the US stock market and report that contagion occurred from the US to the Asian financial markets. Next, using an asymmetric generalized dynamic conditional correlation model (AG-DCC), 3 Forbes and Rigobon (2002) and Samarakoon (2011) separate the impact of financial shocks during normal periods, i.e.…”

Correlation Dynamics in East Asian Financial Markets

“…In the aftermath of the sovereign debt crisis the financial system in the Eurozone turned out to be undercapitalised leading to a recession. The GFC also had serious implications for the emerging markets (see also Yiu et al, 2010). Compared with the EU, the impact of US spillovers on Asia may feed via different channels.…”