Financial market contagion: evidence from the Asian crisis using a multivariate GARCH approach

Recent trends of globalization and financial market internationalization have exposed the vulnerability of many emerging financial markets to external shocks and spillover effects from regional crisis. It is believed that similar spillover effects were the root cause of the 1997 financial crisis that faced many emerging economies in Asia. This study attempts to investigate the spillover effects of the 1997 Asian financial crisis using data from a sample of selected Asian countries. For empirical estimation, we use high frequency data (daily observations) on exchange rates from 1994 to 2002, construct a multivariate GARCH model and apply the Granger causality test to identify inter-linkages among exchange rate markets in selected Asian countries. We also split the sample into three periods (pre-crisis, crisis and post-crisis) to verify if market linkages changed before and after the crisis. The empirical evidence in this paper suggest that currency market linkages increased during and after the crisis. However, we found weak support for contagion in the pre-crisis period.