An Empirical Validation of Financial Contagion by A Multivariate VAR Model

Dr. Islem Boutabba
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Dr. Islem Boutabba: Department of Finance, Shaqra University, KSA

International Journal of Business and Economics, 2019, vol. 18, issue 2, 221-244

Abstract: Financial contagion was first introduced in July 1997 when there was a crisis in Thailand’s exchange market that quickly spread to many other East Asian markets. Our empirical study thus aims at finding evidence of financial contagion between exchange markets, monetary markets, and stock markets in seven countries. Like Primiceri (2005) and Koop and Korobilis (2010), we use the VAR model to detect contagion between markets and intra-markets. We first study the correlations between the different markets of the same kind and then employ tests of the unitary root ADF and PP to determine the offset to be used in the VAR model. Our study highlights the presence of contagion between these markets (intra-market contagion) and contagion in the same market across countries (inter-market contagion). Moreover, we find that contagion largely explains anomalies in markets contrary to conventional finance. However, behavioral finance is still unable to predict future events.

Keywords: Financial Contagion; Behavioral Finance; Financial Markets; Monetary Markets; Stock Markets; Exchange Markets; VAR Model. (search for similar items in EconPapers)
JEL-codes: G01 G1 G4 (search for similar items in EconPapers)
Date: 2019
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