Financial crisis and the changing nature of volatility contagion in the Asia-Pacific region

Abstract

This article uses a multivariate GARCH approach to explore the presence and the changing nature of volatility contagion in the Asia-Pacific region around the financial crisis of 2007–2008 and its possible impact on potential investors in the region. Over the study period of June 2006–December 2010, the selected eight Asia-Pacific economies are characterized by significant intra-regional volatility spillover, the nature of which depends crucially on the global stock price movements. The two booming phases around the said crisis have similar attributes that differ from those of the crisis period. In a boom, changes in domestic and foreign market conditions are less likely to affect volatility in any market. It is only the past volatility that is important. However, in crisis, the spillover effect intensifies, with significant innovation, as well as past volatility impacts. However, the absence of asymmetric volatility spillover leaves a breathing space. A panic cannot at least make situations worse. The presence of volatility spillover, however, could reduce volatility of risk-adjusted return but cannot affect the mean risk-adjusted return.