Can bank be a source of contagion during the 1997 Asian crisis?

Abstract

This paper tests whether bank can be a source of contagion during the 1997 Asian crisis using asset return data from a crisis country – Thailand. In particular, I examine whether Thai banking sector can produce contagion effects in both conditional means and volatilities of its foreign exchange and stock markets during the crisis after controlling economic fundamentals. The test results show that contagion-in-mean effects appear to be multidirectional since return shocks emanating from any one of the three markets can sweep across all markets, but contagion-in-volatility effects are mainly driven by the negative return shocks originating in the banking sector. Overall the empirical evidence indicates that the past return shocks emanating from banking sector have significant impact not only on the volatilities of foreign exchange and aggregate stock markets, but also on their prices, suggesting that bank can be a major source of contagion during the crisis.