Testing for Financial Contagion between Developed and Emerging Markets During the 1997 East Asian Crisis

Arestis, Philip; Caporale, Guglielmo Maria; Cipollini, Andrea; Spagnolo, Nicola

doi:10.2139/ssrn.382420

Testing for Financial Contagion between Developed and Emerging Markets During the 1997 East Asian Crisis

Brunel Business School, Economics and Finance Working Papers No. 05-08

International Journal of Finance & Economics, (2005), vol. 10(4), pages 359-367

17 Pages Posted: 25 Mar 2003 Last revised: 18 May 2009

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Andrea Cipollini

University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Nicola Spagnolo

Brunel University London - Economics and Finance

Date Written: April 1, 2005

Abstract

In this paper we examine whether during the 1997 East Asian crisis there was any contagion from the four largest economies in the region (Thailand, Indonesia, Korea and Malaysia) to a number of developed countries (Japan, UK, Germany and France). Following Forbes and Rigobon (2002), we test for contagion as a significant positive shift in the correlation between asset returns, taking into account heteroscedasticity and endogeneity bias. Furthermore, we improve on earlier empirical studies by carrying out a full sample test of the stability of the system that relies on more plausible (over)identifying restrictions. The estimation results provide some evidence of contagion, in particular from Japan (the major nternational lender in the region), which drastically cut its credit lines to the other Asian countries in 1997.

Keywords: Contagion, Financial crises, Conditional Correlation

JEL Classification: F30, G15

Suggested Citation: Suggested Citation

Arestis, Philip and Caporale, Guglielmo Maria and Cipollini, Andrea and Spagnolo, Nicola, Testing for Financial Contagion between Developed and Emerging Markets During the 1997 East Asian Crisis (April 1, 2005). Brunel Business School, Economics and Finance Working Papers No. 05-08. Available at SSRN: https://ssrn.com/abstract=382420 or http://dx.doi.org/10.2139/ssrn.382420