Contagion Effects of US Subprime Crisis on ASEAN-5 Stock Markets: Evidence from MGARCH-DCC Application

We attempted to investigate the contagion effects of the US subprime crisis on ASEAN-5 stock markets [including Malaysia (conventional and Islamic), Thailand, Singapore, Indonesia, Philippines] by applying MGARCH-DCC through the period of January 1, 2004 to July 5, 2012 on daily stock indices returns, and also Continuous Wavelet Transform coherence method through the period of January 1, 2006 to December 31, 20091 on daily stock indices returns. This is motivated by the fact that the 2007-2009 crises in the US mortgage market were transmitted to the rest of the world through cross-country banking linkages. This paper, to our best knowledge, is the first attempt to explore such issue for the ASEAN-5 markets (including Malaysia Islamic stock market) using the most recent econometric techniques. We found evidence that there were statistically significant contagion effects from the US sub-prime crisis to the ASEAN-5 countries and the contagion occurred probably around mid-2008. Our results tend to indicate consistent co-movement between most of the ASEAN-5 stock markets and the US stock market in the long run. We also uncovered evidence of a wide variation in co-movement across different timescales during the financial crisis. The Malaysia conventional stock market is found to be more contagious than its counterpart, the Malaysia Islamic stock market, and the latter is negatively correlated with the US stock market with a decreasing co-movement pattern even during the crisis period indicating policy implications for portfolio diversification.