Contagion Effect in ASEAN-5 Currency Markets During COVID-19

Abstract

The aim of this study is to examine an existence of contagion in ASEAN-5 currency markets during COVID-19 period, the type of contagion whether it is pure contagion that happens in the short run only or fundamentals-based contagion in the long run and the country source of this contagion effect. The study starts by imposing structure to the regional exchange rates guided by variable lag Granger causality and variable lag Transfer Entropy, followed by co-integration and Error Correction Model (VECM) within the Structural VAR framework to capture the short run, long run and error correction term (ect) in currency market of ASEAN-5. The next empirical framework used is wavelet analysis specifically wavelet power spectrum and wavelet coherency to capture the multi scale time and frequency domain of currency market volatility and covariance respectively. The VECM findings show there exists long run cointegration in the ASEAN-5 currency markets during COVID-19 and any disequilibrium will be adjusted by Indonesian Rupiah, Malaysia Ringgit and Singapore Dollar at daily rate of adjustments of 6.58%, 1.47% and 2.45% respectively. The wavelet power spectrum provides evidence of short run and long run contagion effect in Indonesia, Malaysia and Singapore currency market, while Philippines and Thailand experience minimal contagion effect in the short run and heightened volatility in the long run for Thailand. No long run contagion effect for Philippines. The wavelet coherency shows contagion effect emanating from Indonesia Rupiah to its neighboring countries in the short and only to Thailand and Malaysia in the long run.