Contagion in the World Equity Markets and the Asian Economic Crisis

47 Pages Posted: 26 Feb 2007

See all articles by Robert G. Bowman

Robert G. Bowman


Kam Fong Chan

The University of Western Australia; Financial Research Network (FIRN)

Matthew R. Comer

First New Zealand Capital

Date Written: February 2007


There is growing evidence that economic crises are transmitted across economies and equity markets. This motivates two questions. First, can the direction and magnitude of a country's stock market reaction during an extreme case ("contagion") be explained by economic fundamentals? Second, are there benefits of international diversification during times of widespread contagion among equity markets?

We examine the reaction of major world equity markets to the 1997 Asian Crisis. In particular, we investigate the interrelationships among world equity markets, the factors explaining the different directions and magnitudes of countries' reactions to this crisis and the effectiveness of the global diversification of investment portfolios during financial crises.

Our analyses provide evidence that is consistent with the correlations among world equity markets increasing dramatically during the period of the Asian Crisis. However, this effect is concentrated on a short period around the crisis. The benefits of international diversification may be obtainable, even when the period contains a worldwide financial crisis. We show that the productivity and interest rate macroeconomic variables, worldwide beta and the existence of derivatives trading are important in explaining the stock market returns during the Asian Crisis. The effect of the worldwide beta variable is particularly strong. Finally, the trade variables are insignificant, their influences being subsumed by interest rate and inflation macroeconomic variables.

On balance, we interpret our results as supporting a rational view of the spread of an economic crisis to other markets.

Keywords: Contagion, international market integration, Asian Crisis

JEL Classification: G15, G11

Suggested Citation

Bowman, Robert G. and Chan, Kam Fong and Comer, Matthew R., Contagion in the World Equity Markets and the Asian Economic Crisis (February 2007). Available at SSRN: or

Kam Fong Chan

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

Matthew R. Comer

First New Zealand Capital ( email )

PO Box 5333
Wesley Street
New Zealand

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