Contagion Versus Interdependence : A Re-Examination of Asian-Crisis Stock Market Comovements

This paper presents a framework based on correlation analysis to test for contagion during the episode of financial turmoil surrounding the Asian crisis. In particular, we calculate conditional and unconditional correlation coefficients for 15 countries. We advocate the use of synchronous instead of synchronized data to correctly measure stock market comovements. Considering the two different phases of the Asian crisis, reveals that synchronized data lead to an over-identification of contagion for the early Thailand crisis phase but an under-identification of contagion during the late Hong Kong crisis phase. When using synchronous data, we find little evidence of a significant change in the transmission mechanisms from Thailand to any of the other country in our sample as most financial shocks are thus transmitted through non-crisis-contingent channels. Contrary to the Thailand finding, we find evidence of contagion from the Hong Kong stock market to most of the other stock markets in our sample. This is in contrast with the findings of Forbes and Rigobon (2002) and suggests that most shocks are transmitted through crisis-contingent channels. Overall, our findings should caution researchers and practitioners alike when drawing conclusions based on synchronized data