The Determinants of Domestic and Cross Border Bank Contagion Risk in South East Asia

35 Pages Posted: 20 Mar 2008

See all articles by Amine Tarazi

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Philippe Rous

University of Limoges

Carlos C Bautista

University of the Philippines, Diliman

Date Written: August 2007

Abstract

This paper addresses the issue of both domestic and cross border systemic risk for 8 countries in Southeast Asia (Hong Kong, Indonesia, Korea, Malaysia, The Philippines, Singapore, Taiwan and Thailand). We use weekly data on individual bank stock prices from 2000 to 2005 to construct bank contagion measures based on the exponential weighted average correlations of the residuals of the market model. Our results show that average pair-wise correlations significantly differ among countries and that the probability that a specific shock extends to other banks is better predicted by asset risk indicators and market based risk measures, such as systematic risk, for cross country contagion. In contrast, for domestic contagion, liquidity risk indicators and bank opaqueness proxies perform better. Our findings suggest that whereas illiquidity, but not insolvency, is a major concern at the domestic level the opposite result holds for cross country contagion.

Keywords: Bank contagion, systemic risk, South East Asia

JEL Classification: G21, G29

Suggested Citation

Tarazi, Amine and Rous, Philippe and Bautista, Carlos C, The Determinants of Domestic and Cross Border Bank Contagion Risk in South East Asia (August 2007). Available at SSRN: https://ssrn.com/abstract=965778 or http://dx.doi.org/10.2139/ssrn.965778

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Philippe Rous

University of Limoges ( email )

rue François Mitterrand
Limoges Cedex, FL Limoges 87031
France

Carlos C Bautista

University of the Philippines, Diliman ( email )

Virata School of Business
UP Diliman Campus
Quezon City, 1101
Philippines

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