The Determinants of Domestic and Cross Border Bank Contagion Risk in South East Asia

Carlos Bautista, Philippe Rous () and Amine Tarazi
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Philippe Rous: LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges

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Abstract: This paper addresses the issue of both domestic and cross border systemic risk for 8 countries in Southeast Asia (Hong Kong, Indonesia, Korea, Malaysia, The Philippines, Singapore, Taiwan and Thailand). We use weekly data on individual bank stock prices from 2000 to 2005 to construct bank contagion measures based on the exponential weighted average correlations of the residuals of the market model. Our results show that average pair-wise correlations significantly differ among countries and that the probability that a specific shock extends to other banks is better predicted by asset risk indicators and market based risk measures, such as systematic risk, for cross country contagion. In contrast, for domestic contagion, liquidity risk indicators and bank opaqueness proxies perform better. Our findings suggest that whereas illiquidity, but not insolvency, is a major concern at the domestic level the opposite result holds for cross country contagion.

Date: 2007
Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-00918555v1
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Related works:
Journal Article: The Determinants of Domestic and Cross Border Bank Contagion Risk in Southeast Asia (2008)
Working Paper: The Determinants of Domestic and Cross Border Bank Contagion Risk in Southeast Asia (2008)
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