Dynamic Correlation Analysis of Financial Spillover to Asian and Latin American Markets in Global Financial Turmoil

This paper investigates the spillover of financial crises by studying the dynamics of correlation between eleven Asian and six Latin American stock markets vis-¨¤-vis the US stock market. A regional factor that drives common movements of stock markets in each region is identified for the period from 1993 to early 2009. We then estimate the time-varying volatility correlation between the regional factor and the US stock market by an asymmetric dynamic conditional correlation model. We find that there is a significant rise in the estimated time-varying correlation in the period from August 2007 to March 2009, suggesting evidence of contagion from the US stock market to markets in the two regions during the global financial turmoil. The magnitude of the contagion effect to both regions in the global financial crisis is very similar, albeit their different economic, political and institutional characteristics. On the other hand, we find no evidence of having contagion from the US to the Asian region during the Asian financial crisis in 1997 and 1998 as expected, since the crisis was originated locally.