Contagion and Causality: An Empirical Investigation of Four Asian Crisis Episodes

Abstract

Our study extends on conventional measures of contagion defined as a marked increase of cross-market correlation by directly investigating changing causality pattern by using the Granger-causality methodology. Our results show that the Asian crisis first established new and changed causality patterns that were not present before the crises on a regional base. Moreover, in some cases it even appeared that in the post-crisis period formerly unrelated markets became co-integrated, pointing to a changed perception of emerging country risk. Furthermore, it is shown that while the initial impact of the Asian crisis appeared to be changing only the regional causality pattern the additional impact of the Russian crisis appeared to have changed the causality pattern in an even less predictable way crossing continents at random and thus pointing to the important role of international financial markets in regional and global financial contagion.