Abstract
The purpose of this study is to investigate whether contagion actually occurred during three well-known financial crises in 1990s and 2000s: Mexican “Tequila” crisis in 1994, Asian “flu” crisis in 1997 and US subprime crisis in 2007. We apply dynamic conditional correlation models (DCC-GARCH(1,1)) to daily stock-index returns of eight Asian stock markets, six Latin American stock markets and US stock market. Defining contagion as a significant increase of dynamic conditional correlations, we test for contagion by using a difference test for DCC means. The results obtained shows that there is a pure contagion from crisis-originating markets to other emerging stock markets during these three crisis. However, the contagion effects are different from one crisis to the other. Firstly, during the Mexican crisis, contagion is detected in only the Latin American region. Secondly, during the Asian crisis, we find evidence of contagion in some markets in both the Asian and Latin American regions. Finally, contagion is proved to be present in all stock markets with the only exception for Brazil during US subprime crisis.
Highlights
Since the 1990s, many widespread financial crises have been witnessed such as the Exchange Rate Mechanism (ERM) attacks in 1992, Mexican “Tequila” crisis in 1994, Asian “flu” crisis in 1997, the Russian collapse in 1998, the Brazilian devaluation in 1999, the US subprime crisis in 2007 and more recently, the Greek and European sovereign debt crisis in 2011
We investigate again the presence of contagion effects in Asian and Latin American stock markets during three major crises: the Mexican “Tequila” crisis in 1994, the Asian “flu” crisis in 1997, and the US subprime crisis in 2007
We use the dynamic conditional correlation (DCC) multivariate GARCH models presented in the previous section to test whether the contagion occurred among the region’s markets during the two periods of international financial crises: the Mexican “Tequila” crisis of 1994 and the Asian “flu” crisis of 1997
Summary
Since the 1990s, many widespread financial crises have been witnessed such as the Exchange Rate Mechanism (ERM) attacks in 1992, Mexican “Tequila” crisis in 1994, Asian “flu” crisis in 1997, the Russian collapse in 1998, the Brazilian devaluation in 1999, the US subprime crisis in 2007 and more recently, the Greek and European sovereign debt crisis in 2011. The question about how an initial shock of one market could be transmitted to the others have attracted as much attention of policy makers as academic researchers, especially after Asian crisis in 1997 The latter have so far investigated the transmission mechanisms of the crises and the existence of contagion phenomenon across financial markets. If the crises are transmitted through permanent linkages, such as trade or financial linkages, liquidity support might only delay the transmission of a crisis from one country to another but cannot be effective in reducing a country’s vulnerability to a crisis In this case, policy measures improving the fundamentals are necessary (Moser (2003))
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