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Unobservable Shocks as Carriers of Contagion: A Dynamic Analysis Using Identified Structural GARCH

Author

Listed:
  • Mardi Dungey

    (Univeristy of Cambridge)

  • George Milunovich

    (Macquarie University)

  • Susan Thorp

    (University of Technology, Sydney)

Abstract

Markets in financial crisis may experience heightened sensitivity to news from abroad and they may also spread turbulence into foreign markets, creating contagion. We use a structural GARCH model to separate and measure these two parts of crisis transmission. Unobservable structural shocks are named and linked to source markets using variance decompositions, allowing clearer interpretation of impulse response functions. Applying this method to data from the Asian crisis, we find signifcant contagion from Hong Kong to nearby markets but little heightened sensitivity. Impulse response functions for an equally-weighted equity portfolio show the increasing dominance of Korean and Hong Kong shocks during the crisis, whereas Indonesia\'s infuence shrinks.

Suggested Citation

  • Mardi Dungey & George Milunovich & Susan Thorp, 2008. "Unobservable Shocks as Carriers of Contagion: A Dynamic Analysis Using Identified Structural GARCH," NCER Working Paper Series 22, National Centre for Econometric Research.
    • Handle: RePEc:qut:auncer:2008-11
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    References listed on IDEAS

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    Cited by:

    1. Flavin, Thomas J. & Panopoulou, Ekaterini & Unalmis, Deren, 2008. "On the stability of domestic financial market linkages in the presence of time-varying volatility," Emerging Markets Review, Elsevier, vol. 9(4), pages 280-301, December.
    2. Weber, Enzo, 2009. "Financial Contagion, Vulnerability and Information Flow: Empirical Identification," University of Regensburg Working Papers in Business, Economics and Management Information Systems 431, University of Regensburg, Department of Economics.
    3. Baur, Dirk G., 2012. "Financial contagion and the real economy," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2680-2692.
    4. Rafał SIEDLECKI & Daniel PAPLA, 2016. "Conditional Correlation Coefficient As A Tool For Analysis Of Contagion In Financial Markets And Real Economy Indexes Based On The Synthetic Ratio," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(4), pages 287-299.
    5. Mardi Dungey, 2016. "Comments on "Monetary independence in a financially integrated world: what do measures of interest rate co-movement tell us?"," BIS Papers chapters, in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 207-212, Bank for International Settlements.
    6. Dimitris Kenourgios & Dimitrios Dimitriou, 2014. "Contagion Effects of the Global Financial Crisis in US and European Real Economy Sectors," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(3), pages 275-288, June.

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    More about this item

    Keywords

    Contagion; Structural GARCH;

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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