Spillover Effects of the US Financial Crisis on Financial Markets in Emerging Asian Countries

We estimate dynamic conditional correlations of financial asset returns across countries by an array of multivariate GARCH models and analyze spillover effects of the recent US financial crisis on 5 emerging Asian countries. We find a symptom of financial contagion around the collapse of Lehman Brothers in September 2008. There appears to be a regime shift to substantially higher conditional correlations that persisted for a fairly short-period of time. We also propose a novel approach that allows simultaneous estimations of the conditional correlation coefficient and the effects of its determining factors over time, which can be used to identify channels of spillovers. We find the dominant role of foreign investment for the conditional correlations in international equity markets. The dollar Libor-OIS spread, the sovereign CDS premium, and foreign investment are found to play significant roles in foreign exchange markets.