Crisis Determination and Financial Contagion: An Analysis of the Hong Kong and Tokyo Stock Markets using an MSBVAR Approach

Troug, Haytem Ahmed and Murray, Matt (2015): Crisis Determination and Financial Contagion: An Analysis of the Hong Kong and Tokyo Stock Markets using an MSBVAR Approach.

Abstract

International financial crises have often been blamed on the phenomena of ‘financial contagion.’ However, despite extensive research over the past two decades, the existence of financial contagion has been widely contested with many economists failing to agree upon appropriate methods for time-series selection and correlation modelling. Although much research appears to have been conducted into the existence of contagion during financial crises of the 1990’s, there is seemingly less analysis of the subject using recent financial data. Using multi-frequency stock market data from the Hang Seng and Nikkei 225 Indices over the period 2004-2014, this paper analyses correlations between the Hong Kong and Tokyo stock markets over different subsamples, adding to the lasting debate of financial contagion. Employing Pearson and Spearman correlation measures, the dynamic relationship of these two markets is determined over tranquil and crisis periods, as specified by an MSBVAR model. We find evidence in support of the existence of financial contagion (defined as an increase in correlation during a crisis period) for all frequencies of data analysed. This contagion is greatest when examining lower-frequency data. Additionally, there is also weaker evidence in some data subsamples to support ‘herding’ behaviour, whereby higher market correlations persist, following a crisis period.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial contagion; correlation; MSBVAR
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; G - Financial Economics > G0 - General; G - Financial Economics > G0 - General > G00 - General; G - Financial Economics > G0 - General > G01 - Financial Crises

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