Mardi Dungey

Empirical Modelling of Contagion: A Review of Methodologies

The existing literature promotes a number of alternative methods to test for the presence of contagion during financial market crises. This paper reviews those methods, and shows how they are related in a unified framework. A number of extensions are also suggested which allow for multivarite testing, endogeneity issues and structural breaks.

ARE FINANCIAL CRISES ALIKE

This paper investigates whether financial crises are alike by considering whether a single modeling framework can fit multiple distinct crises in which contagion effects link markets across national borders and asset classes. The crises considered are Russia and LTCM in the second half of 1998, Brazil in early 1999, dot-com in 2000, Argentina in 2001-2005, and the recent U.S. subprime mortgage and credit crisis in 2007. Using daily stock and bond returns on emerging and developed markets from 1998 to 2007, the empirical results show that financial crises are indeed alike, as all linkages are statistically important across all crises. However, the strength of these linkages does vary across crises. Contagion channels are widespread during the Russian/LTCM crisis, are less important during subsequent crises until the subprime crisis, where again the transmission of contagion becomes rampant.

Extending a SVAR Model of the Australian Economy

Dungey and Pagan (2000) present a SVAR model of the Australian economy which models macroeconomic outcomes as transitory deviations from a deterministic trend. In this paper we extend that model in two directions. First, we relate it to an emerging literature on Dynamic Stochastic General Equilibrium modelling of small open economies. Second, we allow for both transitory and permanent components in the series and show how this modification has an impact on the design of macroeconomic models.

Correlation, Contagion, and Asian Evidence*

This paper examines the empirical literature on financial market contagion in Asia during the 199798 financial crises with respect to existing tests of contagion. Empirical evidence shows that contagion affects both developed and emerging markets and does not seem to vary with the relative fundamental economic health or trade and financial linkages of the Asian economies. Contagion occurs across both asset types and geographical borders and tends to have larger effects in equity markets than in currency and bond markets. There is evidence to support the hypothesis that contagion is regional and transmitted through developed markets. A discussion of the behavior of correlation coefficients in the presence of contagion and financial crises suggests that they are not a reliable metric for detecting contagion.

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

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.

Unanticipated Shocks and Systemic Influences: The Impact of Contagion in Global Equity Markets in 1998

August to September 1998 has been characterized as one of the worst episodes of global financial distress in decades. This paper investigates the transmission of the Russian and the LTCM crises through global equity markets using a panel of 14 developing and industrial countries. The results show that contagion was systemic during the period, with industrial countries providing the dominant cross-country transmission linkages. Both crises reinforced each other, highlighting the importance of studying them jointly. An implication of the empirical results is that models of contagion that exclude industrial countries are potentially misspecified and may yield misleading outcomes.

Equity Transmission Mechanisms from Asia to Australia: Interdependence or Contagion?

The linkages between daily Asian and Australian equity market returns over the period 1995–2001 are investigated within the framework of a latent factor model. Transmission mechanisms arising from both market interdependence and contagion are studied. The empirical results reveal that co-movements in Asian and Australian equity markets are largely determined by interdependent linkages arising from common systemic factors. There is little significant evidence of contagion, although negative shocks have more effect than positive ones.

Decomposing exchange rate volatility around the Pacific Rim

Volatility in exchange rates is decomposed into components associated with domestic and international concerns for six Pacific Rim currencies. A latent factor model is used to model bilateral exchange rate changes as the weighted sum of three factors; two factors are uniquely associated with each of the currencies involved in the exchange rates and the other represents world shocks common to all exchange rates.

The impact of natural disasters on household income, expenditure, poverty and inequality: evidence from Vietnam

Natural disasters are expected exacerbate poverty and inequality, but little evidence exists to support the impact at household level. This article examines the effect of natural disasters on household income, expenditure, poverty and inequality using the Vietnam Household Living Standard Survey in 2008. The effects of a natural disaster on household income and expenditure, corrected for fixed effects and potential endogeneity bias, are estimated at 6.9% and 7.1% declines in Vietnamese household per capita income and expenditure, respectively. Natural disasters demonstrably worsen expenditure poverty and inequality in Vietnam, and thus should be considered as a factor in designing poverty alleviation policies.

Characterizing Global Investors' Risk Appetite for Emerging Market Debt During Financial Crises

The effects of unanticipated movements in global risk on nine emerging bond markets are investigated. The components of global risk are volatility, credit, and liquidity risks. Country and contagion risks are also studied individually. A historical decomposition of bond spreads is used to identify the relative contributions of risk during 1998-99. The empirical results show that the Russian/LTCM crises were characterized by increases in global credit risk, while the relative size of global risk factors was mixed for the Brazilian crisis, with no component dominating. Country risk is found to be important for all countries, while there is little evidence of contagion risk.