Dynamic Correlation Analysis of Financial Contagion: Evidence from Asian Countries

23 Pages Posted: 23 Nov 2008

See all articles by Thomas Chinan Chiang

Thomas Chinan Chiang

Drexel University - Department of Finance

Bang Nam Jeon

Drexel University - Department of Economics & International Business; Drexel University-School of Economics

Humin Li

West Chester University of Pennsylvania - School of Business and Public Affairs - Department of Economics and Finance

Abstract

This paper reexamines Asian stock market contagion by applying a dynamic multivariate GARCH model to daily stock-return data in nine Asian countries and the United States during the period from 1996 to 2003. The empirical results find supportive evidence of a contagion effect. By analyzing the correlation-coefficient series, this paper identifies two phases of the Asian crisis. The first phase shows an increase in correlation (contagion) and the second phase shows continued high correlation (herding). Statistical analysis of the correlation coefficients shows shifts in the level as well as in the variance of the correlation coefficients during the crisis period, casting some doubt on the benefit of international portfolio diversification. This study finds that international rating agents play significant role in shaping the structure of dynamic correlations in the Asian markets.

Keywords: Financial contagion, Asian crises, Herding, Dynamic correlation coefficient, Sovereign rating

JEL Classification: F30, G15

Suggested Citation

Chiang, Thomas C. and Jeon, Bang Nam and Li, Humin, Dynamic Correlation Analysis of Financial Contagion: Evidence from Asian Countries. Journal of International Money and Finance, Vol. 26, No. 7, 2007, Available at SSRN: https://ssrn.com/abstract=1052661

Thomas C. Chiang (Contact Author)

Drexel University - Department of Finance ( email )

32nd & Chestnut Streets
Philadelphia, PA 19104
United States
215-895-1745 (Phone)

Bang Nam Jeon

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Drexel University-School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Humin Li

West Chester University of Pennsylvania - School of Business and Public Affairs - Department of Economics and Finance ( email )

West Chester, PA 19383
United States
610-436-6947 (Phone)

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