Abstract
This paper extends recent investigations into risk contagion effects on stock markets to the Vietnamese stock market. Daily data spanning October 9, 2006 to May 3, 2012 are sourced to empirically validate the contagion effects between stock markets in Vietnam, and China, Japan, Singapore, and the US. To facilitate the validation of contagion effects with market-related coefficients, this paper constructs a bivariate EGARCH model of dynamic conditional correlation coefficients. Using the correlation contagion test and Dungey et al.?s (2005) contagion test, we find contagion effects between the Vietnamese and four other stock markets, namely Japan, Singapore, China, and the US. Second, we show that the Japanese stock market causes stronger contagion risk in the Vietnamese stock market compared to the stock markets of China, Singapore, and the US. Finally, we show that the Chinese and US stock markets cause weaker contagion effects in the Vietnamese stock market because of stronger interdependence effects between the former two markets.
Highlights
We find that the sub-prime mortgage crisis resulted in contagion effects between Vietnam, and China, Japan, Singapore, and the US, and interdependence effects between Vietnam, and China and the US
From the value of the coefficient 1, we find that the impact of structural changes on the SH and Shenzhen-Composite Index (SZ) markets is negative in the mean equation, but positive for the S&P 500 Index (SP500) and US markets, whereas the other results are not significant
We further validate that H 0 : μ 0, while the results show that the means of all sets of dynamic conditional correlation (DCC) coefficients are significantly positive and different from zero
Summary
At the forefront of contagion theory are propagation mechanisms, which explain the characteristics of co-movements between the markets in different countries. In light of the foregoing, this paper applies the dynamic conditional correlation (DCC) model proposed by Engle (2002) to estimate the correlation coefficients of stock market returns over time and Mardi Dungey et al (2005) contagion test. These approaches are consistent with real-life economic and financial environments and they materially improve the verification validity for contagion effects compared with using fixed or adjusted correlation coefficients
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