Contagion effects during the Asian financial crisis: stock price data

Most governments of affected economies during the Asian financial crisis tend to gravitate towards a self-fulfilling expectations story of multiple equilibria, i.e. macroeconomic fundamentals are sound and that their economies were simply affected by the spillover effects of the Thai, Indonesian and even the Korean crises. In this paper, we examine the nature and extent of contagion during the Asian financial turmoil using evidence from movements in the national stock markets. In particular we determine the extent of stock price movements in the crisis-affected countries on those of other countries. Also, this paper highlights the difference in co-movements of stock prices before and after the crisis. This study confirms the contagion effect during the Asian financial crisis using a vector error correction model, and impulse response functions and variance decomposition of a daily VAR model.