Volatility Contagion in the Asian Crisis: New Evidence of Volatility Tail Dependence

18 Pages Posted: 3 Apr 2014

See all articles by Alexander Karmann

Alexander Karmann

Dresden University of Technology - Faculty of Economics and Business Management

Rodrigo Herrera

University of Talca

Date Written: May 2014

Abstract

We analyze empirically the existence and the extent of financial contagion by means of extreme value theory in the Asian crisis. We consider two key markets, the stock exchange and the foreign exchange using daily data in the period 1992–2001. We present several notions of financial contagion as a significant change in volatility tail dependence (VTD) among different assets. To this end, we introduce a semiparametric VTD estimator in the framework of regularly varying strictly stationary time series. Our analysis provides mixed evidence with respect to the “interdependence vs contagion” dispute. Within‐country contagion is more likely to hold than across‐country contagion. Because the latter is typically symmetric, contagion in stocks and foreign exchange coincide, in line with “portfolio rebalancing” arguments. Across‐market contagion supports the “wake up call” argument of loss of confidence, as small countries' currency markets affect contagiously the stock markets of the larger economies.

Suggested Citation

Karmann, Alexander J. and Herrera, Rodrigo, Volatility Contagion in the Asian Crisis: New Evidence of Volatility Tail Dependence (May 2014). Special Issue: Issues in Asia. Guest Editor: Laixun Zhao, Vol. 18, Issue 2, pp. 354-371, 2014. Available at SSRN: https://ssrn.com/abstract=2419769 or http://dx.doi.org/10.1111/rode.12089

Alexander J. Karmann (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Rodrigo Herrera

University of Talca ( email )

2 Norte 685
Talca, 3460000
Chile

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