Are Spillovers Changing During Crises? Evidence from the Threshold VAR Models

In this paper, we investigated changes in the linkages between capital markets by applying the threshold vector autoregressive (TVAR) models to the stock returns of the US and of four East-South Asian markets. We employed the estimating and testing procedures proposed by Tsay (1998) and Hansen and Seo (2002). Linkages of the Asian markets with the US counterpart are shown to follow a two regime model. This result is highly significant and is in line with the theoretical and empirical literature pointing out to a difference in the nature of cross-border return spillovers in tranquil and crisis periods. Also consistent with previous findings, we find returns to be highly negative and variance to be high in the crisis periods, with the US returns being the best indicator for the regime change. The impulse response analysis shows an asymmetric absorption of external shocks given a high value of the shock, due to the regime change induced by the shock's arrival