CONTAGION EFFECTS OF THE ASIAN FINANCIAL CRISIS: REGIONAL OR GLOBAL IN SCOPE?

This paper examines the time-dependence of stock market return correlations. The increased frequency of financial crises (currency. banking, equity markets) and the experience of regional waves (ERM, Latin America. Asian) in such crises has focused attention on the phenomenon of contagion, whereby a crisis in one country leads to crises in other, geographically connected countries. Correlations represent one of the ways to determine the degree of linkage across national equity markets. This paper examines the characteristics of the Asian financial crisis from the behavior of stock prices in eight countries. Patterns in the co movements of stock prices are examined before, during and after the period of financial turmoil in eight Asian economies. The findings based on correlation and vector autoregression analyses are consistent with contagion effects among the selected equity markets. A measure of market integration calculated over the pre-crisis, crisis, and post-crisis periods suggests that five of the eight equity markets became more integrated in the global financial market context notwithstanding the turmoil surrounding the Asian financial crisis.