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

Mardi Dungey (), George Milunovich () and Susan Thorp ()

No 22, NCER Working Paper Series from National Centre for Econometric Research

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.

Keywords: Contagion; Structural GARCH (search for similar items in EconPapers)
JEL-codes: F37 C51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-sea
Date: 2008-02-25
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