University of New South Wales

Contagion Across Financial Markets: An Empirical Assessment

Email address: mardi.dungey@anu.edu.au

JEL Classifications: C15, F31

Abstract:
Information transferred between Žnancial markets can be important during a Žnancial crisis. Using a latent factor model of returns we consider spillovers and contagion between currency and equity markets for a panel of countries in the East Asian cirsis of 1997-98. Financial returns are modelled as a linear combination of unobserved factors representing: shocks unique to the market and country, country-speciŽc shocks, common market shocks, world shocks, spillovers between markets and contagion between markets. Using a deŽnition adapted from Masson (1998,1999), contagion is modelled as the eects of the residual in one market on the other, after controlling for all other forms of shock. The results show that spillovers and contagion from currency markets accounted for the vast majority of equity market volatility. With the exception of Indonesia, contagion from equity markets had little eect on currency markets. Indonesian returns show strong evidence of contagion eects in both equity and currency markets. Keywords: contagion, spillovers, indirect estimation, Žnancial markets.

PDF file of paper: dungey.pdf

Session: Currency Crisis

Time: Sunday, 8 July, 2:15pm - 3:45pm

Room: E