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A Multifactor Model of Exchange Rates with Unanticipated Shocks: Measuring Contagion in the East Asian Currency Crisis

Author

Listed:
  • Mardi Dungey

    (Centre for Applied Macroeconomic Analysis, Australian National University, Canberra, mardi.dungey@anu.edu.au)

  • Vance L. Martin

    (University of Melbourne)

Abstract

A multifactor model of exchange rates is proposed which allows for both time-dependent common and idiosyncratic factors, as well as unanticipated shocks across currency markets. This latter feature of the model is exploited in the empirical application to measure the contribution of contagion to the volatilities of exchange rates during the East Asian currency crisis. The empirical results show evidence of significant contagion. The contribution of contagion is estimated at 9 per cent of total volatility for the Thai baht and 46 per cent for the South Korean won. Indonesia is found to be the most affected in terms of basis points.

Suggested Citation

  • Mardi Dungey & Vance L. Martin, 2004. "A Multifactor Model of Exchange Rates with Unanticipated Shocks: Measuring Contagion in the East Asian Currency Crisis," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(3), pages 305-330, December.
    • Handle: RePEc:sae:emffin:v:3:y:2004:i:3:p:305-330
    DOI: 10.1177/097265270400300305
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    References listed on IDEAS

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