Was financial market contagion the source of economic crisis in Asia? Evidence using a multivariate VAR model

The episodes of financial crises in many parts of the world during the 1990s have sparked interest in identifying channels through which such crises spread from one country to another. Researchers have identified several factors that may have sparked and induced contagion. This study further extends the existing research by identifying and testing three financial market variables to trace the alleged origin and the subsequent path of the contagion during the 1997 Asian Crisis. Foreign exchange rates, stock market prices and interest rates are three main financial market indicators, representing the currency, stock and money markets, respectively. We use a sample of nine East Asian countries, including Japan, construct a VAR model and use daily observations for empirical estimation. We investigate the interlinkages among different markets and different countries within the Asian region using the Granger causality. The empirical evidence, in this paper, does not find strong support for contagion. We further extend the analysis by looking at the impulse responses. The results still do not find strong support for a contagion case.