Contagion: Evidence From International Banking Industry
Posted: 28 Feb 2021
Date Written: January 2, 2004
This paper tests whether contagion can occur at the industry level, in particular the banking industry. In this paper ‘contagion’ is defined as significant spillovers of country-specific idiosyncratic shocks during the crisis after economic fundamentals or systematic risks have been accounted for. The economic fundamentals under intertemporal capital asset pricing model (ICAPM) are world market and Fama-French’s (FF) size and book-to-market risks, so the evidence of contagion is based on testing whether idiosyncratic risks—the part that cannot be explained by the world market and FF risks, are significant in describing the dynamics of international banking sector returns during the 1997 Asian crisis. Using data from Thailand, Japan, and the US, strong evidence of contagion is found. Specifically, the return shocks originating in Thailand have significant impact on the return dynamics of both Japanese and the US banking sectors. On the other hand, the return shocks generated from the US have also significant impact on Thai and Japanese banking sectors. However, the return shocks emanating from Japan have significant impact on Thailand only. These findings suggest that the contagion can spread from a crisis-country not only to a non-crisis country within the same region, but also to another non-crisis country outside the region.
Keywords: Bank, Contagion, Fama-French factors, Multivariate GARCH-M
JEL Classification: C32, G12
Suggested Citation: Suggested Citation