Volatility Spillovers and Contagion During the Asian Crisis

Transcription

1 Emerging Markes Finance and Trade, vol. 42, no. 2, March April 2006, pp M.E. Sharpe, Inc. All righs reserved. ISSN X/2006 $ KANOKWAN CHANCHAROENCHAI AND SEL DIBOOGLU Volailiy Spillovers and Conagion During he Asian Crisis Evidence from Six Souheas Asian Sock Markes Absrac: Using a mulivariae generalized auoregressive condiional heeroskedasiciy (GARCH-M) model, we invesigae volailiy spillovers in six Souheas Asian sock markes around he ime of he 1997 Asian crisis. We focus on ineracions wih he U.S. marke as a world financial marke, and wih he Japanese marke as a regional financial marke. We also use bivariae GARCH-M models o examine he behavior of individual markes and heir ineracions wih oher markes in he region. All models lend suppor o he idea of he Asian conagion, which sared in Thailand and rapidly spread o oher markes. Key words: Asian financial crisis, conagion, sock markes, ime series models. The Souheas Asian economies were he envy of many counries before he financial and currency crisis of July 1997, which began in Thailand and spread rapidly o Malaysia, he Philippines, Indonesia, Korea, Taiwan, and Hong Kong. The crisis had a surprising and dramaic effec on boh he financial and real secors of he affliced counries. A is core were he large-scale foreign capial inflows ino Souheas Asian financial sysems, which became vulnerable o panic and sudden reversals of marke confidence (Charumilind e al. 2006; Jeon and Seo 2003; Kanokwan Chancharoenchai is a lecurer in he Faculy of Economics a Kasesar Universiy, Bangkok, Thailand. Sel Dibooglu (dibooglus@yahoo.com) is an associae professor a he Universiy of Missouri S. Louis. Sel Dibooglu acknowledges research suppor from he Cener for Inernaional Sudies a he Universiy of Missouri S Louis. The opinions expressed herein are solely hose of he auhors dibooglu.pmd 5

2 6 EMERGING MARKETS FINANCE AND TRADE Nagayasu 2001). Mos of he economic aciviy ha he capial inflows suppored in he affeced counries was highly producive, so he loss of economic aciviy from he sudden inflow reversal was enormous. This forced he economies ino sharp downurns. The crisis promped he larges financial bailous in hisory, and was he mos severe financial crisis o hi he developing world since he 1982 deb crisis. Indonesian gross domesic produc (GDP) conraced by more han 15 percen in 1998, and he Korean and Thai economies conraced by approximaely 7 and 10 percen respecively. The crisis also hreaened he growh of oher emerging and ransiion economies, and as such, i is imporan o undersand he paern of volailiy spillovers, he exen o which such spillovers migh have influenced oherwise sound economies, and how hese effecs could be miigaed. 1 This paper explores he conagion effecs of he Asian crisis on Asian regional sock markes, including Japan, and global markes, as proxied by he U.S. sock marke. To capure he ineracions among he larger markes and emerging markes, we use a mulivariae generalized auoregressive condiional heeroskedasiciy (GARCH-M) framework. As he crisis sared from Thailand and rapidly spread o oher neighboring counries, we examine he dynamics of conagion from he Thai sock marke o five Asian emerging markes using a bivariae GARCH-M model. We use daa from six emerging Asian sock markes: Thailand (TH), he Philippines (PH), Indonesia (IN), Malaysia (MA), Korea (KO), and Taiwan (TW). As a preliminary sep, we explore he dynamic ineracions of each of he Asian markes wih wo major sock markes, hose of Japan (JP) and he Unied Saes (US). We hen examine he conagion and spillover effecs of he Asian crisis beween each possible pair of counries in he sample: Thailand, he Philippines, Indonesia, Malaysia, Korea, and Taiwan. We consider wo samples: daa prior o he Asian crisis (January 3, 1994 o December 31, 1996), and an exended sample (January 3, 1994 o December 31, 1999). Daa and Mehodology To invesigae he behavior of excess reurn volailiy and volailiy spillovers, we consider he daily closing price of six emerging Asian markes. All indices are denominaed in local currency and expressed in daily percenages. The daily sock price indices are all drawn from Daasream. To proxy he risk-free raes of reurn, we use he hree-monh T-bill rae for he Philippines, he six-monh middle deposi rae for Indonesia, he inerbank overnigh rae for Thailand, he inerbank wo-monh offered rae for Malaysia, he negoiable cerificae of deposi (NCD) niney-one-day yield for Korea, he money marke 180-day middle rae for Taiwan, he hree-monh middle rae T-bill rae for Japan, and he hree-monh T-bill second marke middle rae for he Unied Saes. The porfolio weighs reflec he relaive size of he markes, and are calculaed from monhly marke capializaion 01 dibooglu.pmd 6

3 MARCH APRIL daa in U.S. dollars. Daily daa for boh he ineres rae and marke capializaion are also from Daasream. The excess reurns, r, are he sock reurns, R s,, ne of he risk less rae, R f,, r = R R (1) s, f,, where R s, is he firs difference of sock prices in logarihms, lnspi lnspi 1, and all daa used comprise daily closing values of sock marke indices. Le he condiional variance of he excess reurns and covariance beween he domesic marke porfolio and foreign marke porfolio be h and cov(r d,r f, ) respecively. The relaion beween he expeced excess reurn and boh h and cov(r d,r f, ) can be esimaed by regressing boh he excess reurns r on he predicable componen of sock marke volailiy, and he covariance, cov(r d,r f, ). Wih daily daa from differen geographical regions, rading hours generally overlap in a calendar day. The Asian markes open before he U.S. marke does. Therefore, he U.S. marke reurns may predic emerging marke and Japanese marke reurns. Since he Asian markes close before he U.S. marke does more specifically, on he previous calendar day he Asian marke reurns do no help o explain previous-day U.S. reurns. As in Chan e al. (1992), o accoun for he lack of synchronizaion in rading hours, one lagged disurbance of he U.S. reurns is incorporaed in he Asian reurns. In addiion, reurns for each counry depend on one lagged disurbance o capure he effecs of infrequen rading on he dynamics of index reurns. 2 For our hree-dimensional model, wih a major regional marke (Japan), a global marke (he Unied Saes), and each of he six Pacific Asia emerging sock markes (p), he ypical condiional mean equaion can be expressed as r r = λ +α r +δ ε +δ ε +λ ω h p, p0 p p, 1 p1 p, 1 p2 us, 1 p1 p, p, ( r r ) ( r r ) +β ω cov, +β ω cov, +ε us1 us, p, us, p1 jp, p, jp, p, r =λ +α r +δ ε +λ ω h us, us0 us us, 1 us1 us, 1 us1 us, us, ( r r ) ( r r ) +β ω cov, +β ω cov, +ε p1 p, p, us, jp1 jp, us, jp, us, = λ +α r +δ ε +δ ε +λ ω jp, jp0 jp jp, 1 jp1 jp, 1 jp2 us, 1 jp1 jp, jp, ( r r ) ( r r ) +β ω cov, +β ω cov, +ε p2 p, p, jp, us2 us, us, jp, jp, h (2) ( H ) ε ~ N 0,, where [H ] is he variance covariance marix, and [ε ] is he vecor of error erms from esimaing r p, r us, and r jp. Formulaed his way, he monhly excess reurns r p, 01 dibooglu.pmd 7

4 8 EMERGING MARKETS FINANCE AND TRADE on a ypical Asian emerging marke porfolio may be influenced by nondomesic facors. To implemen he model empirically, i is imporan o specify he dynamics of condiional variance and covariance. Exending he sandard (univariae) GARCH- M model, Bollerslev e al. (1988) propose a mulivariae GARCH-M specificaion ha allows he covariance erms o influence he domesic reurn process. For he hree-dimensional case (rivariae GARCH-M process), he condiional variance covariance specificaion can be expressed as Vec h p, p φ hus, φus hjp, φ jp H = = cov ( rp,, rus, ) φ pus, cov( rp,, r( jp, ) p, jp φ cov ( rus,, rjp, ) φus, jp ε α 0 α ε 0 0 α ε α ε ε α55 0 ε ε α66 ε ε 2 p, 1 2 us, 1 2 jp, 1 p, 1 us, 1 p, 1 jp, 1 us, 1 jp, 1 h p, 1 ν p, γ hus, 1 0 γ νus, h jp, γ ν jp, γ cov ( rp, 1, rus, 1) +, ν pus, γ55 0 cov ( rp, 1,r( jp, 1) ν pjp, γ66 cov ( r ) usjp us r,, 1, ν jp, 1 (3) where Vec( ) is he vecor operaor ha sacks he columns of he marix [H ], and [φ], [α], and [γ] are diagonal coefficien marices. Addiionally, wih Equaions (2) 01 dibooglu.pmd 8

5 MARCH APRIL and (3), he analysis of dynamic paerns of variances is modeled by GARCH(1,1), as commonly used in he lieraure. We ignore higher-order erms of lagged condiional variances or predicion errors, following he empirical findings of French e al. (1987), who show ha using a GARCH(2,1) o model condiional variance of excess reurns h does no appear o differ significanly from using a GARCH(1,1). The rivariae condiional variance covariance specificaion of Equaion (3) allows he condiional variances o depend only on pas squared residuals, and covariances o depend on pas producs of error erms. The imporan cross-marke effecs, highlighed by Hamao e al. (1990) for he naional sock markes of he Unied Saes, Unied Kingdom, and Japan, are no sufficienly included in he Bollerslev e al. (1988) rivariae GARCH-M model. Even hough a more general process could be specified o capure cross-marke spillover effecs, posiive semidefinieness of he condiional covariance marix in ha process is no assured. To reflec more general dynamics in model (3), he [α] and [γ] marices would have o include nonzero, off-diagonal elemens. The condiional variance covariance specificaion is, herefore, respecified ino Equaion (4), as originally proposed by Baba e al. (1989), denoed as BEKK below: H = [ P] [ P] + [ F] H [ F] + [ G] ε ε [ G] (4) 1 1 1, where [H ] denoes he 3 3 variance covariance marix condiional on informaion a ime, and [ε 1 ] denoes he vecor of disurbances from Equaion (2). The erm [P] is an upper riangular marix of hree coefficiens, whereas [F] and [G] are free (square) marices of coefficiens wih nine parameers for each. Unlike full parameerizaion, his approach economizes he number of parameers in Equaion (3) (weny-four, including he inercep parameer for he rivariae sysem used here), and guaranees ha he covariance marices are posiive definie. Consequenly, he model, wih he hree equaions above, he condiional mean (2), and he condiional variance (3) and (4), allow for considerable dynamics in he risk-premium relaion beween he marke porfolio of own asses and he covariance of reurns wih oher markes. This covariance is a weighed average of he variance of he marke porfolio of domesic asses and he covariance of he reurns on he marke porfolio of domesic asses wih he marke porfolio of foreign asses (foreign influences), where he weighs are he proporions of domesic and oher socks in he world marke porfolio. Empirical Resuls Ideally, our model should esimae an eigh-variable mulivariae GARCH-M model of he full se of sock excess reurns, o accoun for conagion or spillover effecs among he eigh markes. Unforunaely, his would require esimaing 80 parameers in he firs momen and 162 parameers in he second momen, which is 01 dibooglu.pmd 9

6 10 EMERGING MARKETS FINANCE AND TRADE impossible wih prevailing compuing echnology and numerical mehods. Therefore, his sudy focuses on wo subsysems: hree-variable and wo-variable GARCH-M models on he daily sock excess reurns. The hree-variable (rivariae GARCH-M) model includes one of he six emerging sock markes in Asia and wo developed markes, Japan (using he Tokyo Sock Exchange as a regional marke) and he Unied Saes (using he New York Sock Exchange as he global marke), o capure volailiy ransmission from regional and world markes o he six Asian emerging sock markes. We use he wo-variable (bivariae GARCH-M) model o explore volailiy spillovers beween any given pair of he emerging markes. The mulivariae GARCH-M approach shows he relaion beween he variance of he respecive marke and he variance of oher markes, and describes he effec ha he covariance beween he markes has on he excess reurns on ha marke as a volailiy spillover effec. The porfolio weighs ω are based on daily capializaion daa in U.S. dollars, relaive o he value of he sum of he relevan markes, and reflec he relaive size of he markes invesigaed. Even hough we alluded o excess reurns having a mulivariae -disribuion, Chan e al. (1992) showed ha resoring normaliy in he sample by removing ouliers did no change he resuls very much. Given heir resuls and convergence problems, we use he mulivariae normal disribuion in he opimizaion rouine. Evidence from Trivariae GARCH-M Models Table 1 presens esimaion resuls for he Thailand Japan Unied Saes rivariae GARCH-M model using he BEKK parameerizaion, 3 relaing each sock marke of he six Asian emerging marke indices o he regional (Japan) and global (Unied Saes) sock markes. In he mean equaions in each esimaed model, he inercep parameers are mosly negaive. These large negaive-inercep erms are no surprising, since reduced capial gains axes on long-erm asses provide incenives o hold hose asses, despie oherwise unfavorable raes of reurns (Bollerslev e al. 1988). They also reflec ha equiy holders did consisenly worse over he sample period. Furhermore, he ime-series analysis indicaes ha mos counry sock index reurns exhibi firs-order serial correlaion, which can be explained by insiuional facors, such as bid-ask spreads and nonsynchronous rading in individual socks. 4 The significan coefficiens of one lagged disurbance for he emerging marke (δ 1 ) and he Unied Saes (δ 2 ) also show ha he asynchronism in rading imes is successfully capured in he model, as Chan e al. (1992) sugges. This finding hus srongly suppors he effec of differen calendar days, and canno be ignored in he analysis. In addiion, he mean equaions show ha he effecs of condiional variance in each individual marke he values of he λ 1 parameer are, wih few excepions, all posiive, bu have weak explanaory power for marke excess reurns in almos all cases, according o asympoic - saisics. This lack of significance of he coefficien on he variance is somewha surprising, and implies ha ime variaion in he condiional variance of he enire 01 dibooglu.pmd 10

7 MARCH APRIL Table 1 Trivariae GARCH-M Esimaes from Thailand, Japan, and Unied Saes Daily Excess Reurns Esimaes of coefficiens of condiional excess reurns ( p us ) ( p jp ) ( ) rp, =λ p +α prp +δ p ε p +δ p ε us +λ p ω p hp +β us ω us cov r,, r, +β jp ω jp cov r,, r, +ε 0, 1 1, 1 2, 1 1,, 1, 1, p, rus, =λ us +α us rus +δ us ε us +λ us ω us hus +β p ω p cov( rp, rus ) +β jp ω jp cov rus, rjp +ε 0, 1 1, 1 1,, 1,,, 2,,, us rjp, = λ jp +α jp rjp +δ jp ε jp +δ jp ε us +λ jp ω jp hjp +β p ω p cov ( rp,, rjp, ) +β us ω us cov ( rus,, rjp, ) +ε 0, 1 1, 1 2, 1 1,, 2, 2, jp, Before Asian crisis Exended sample (January 5, 1994 o December 31, 1996) (January 21, 1994 o December 31, 1999) Thailand Unied Saes Japan Thailand Unied Saes Japan λ ( 0.56) ( 1.16) ( 0.76) ( 0.06) (0.56) (1.56) α (3.73)** (0.66) (1.26) (2.24)* (0.30) (1.58) δ ( 2.55)** ( 0.36) ( 1.01) ( 0.87) (0.10) ( 1.29) δ (5.99)** (6.32)** (8.21)** (12.31)** λ (1.19) (1.32) (0.82) ( 0.07) (1.80)* (0.04) β p (0.21) (0.35) ( 0.63) ( 3.29)** β us ( 1.02) (0.34) ( 0.74) (1.44) β jp (1.37) (0.02) (0.14) (2.27)** (coninues), 01 dibooglu.pmd 11

8 12 EMERGING MARKETS FINANCE AND TRADE Table 1 (Coninued) Esimaes of coefficiens of variance covariance marix H [ ] [ ] [ ] [ ] [ ] = P P + F H 1 F + G ε 1 ε 1 [ G] P (2.24)** ( 0.01) P (0.33) (0.02e 1 ) P (0.68) ( 0.01) P (3.15)** (0.16) P ( 0.20) ( 0.06) P e 1 (0.02e 5 ) (0.01e 3 ) G (12.21)** (15.99)** G (0.19) (4.55)** G (2.17)* (5.48)** G (0.86) ( 2.57)** G ( 0.47) (14.71)** G (1.25) (2.80)** G (2.67)** (8.09)** G (1.32) (0.14) G (7.95)** ( 7.77)** F (0.92) ( 1.50) F ( 0.53) ( 5.90)** F ( 3.62)** ( 21.34)** F ( 0.20) (2.578)** F (0.19) (36.89)** F ( 0.12) ( 4.75)** F ( 1.54) (21.56)** F ( 0.08) ( 1.88)* F (16.65)** (4.73)** Noes: Porfolio weighs reflec relaive sizes of he hree markes. Numbers in parenheses are -saisics. Reurns are denominaed in domesic currency. ** Saisically significan a he 1 percen level. * Saisically significan a he 5 percen level. 01 dibooglu.pmd 12

9 MARCH APRIL marke is no an imporan source of variaion in excess reurns. However, his weak marke premium effec does no necessarily indicae he absence of a premium associaed wih nondiversifiable risk in he movemens of he oal marke. I may be a sign of mulicollineariy, or weak evidence of ime variaion in marke risk. While he marke s variance (λ 1 ) has a posiive effec in general, he coefficiens on he covariance erms have negaive and posiive signs. Specifically, in he complee sample, Indonesian expeced excess reurns depend negaively on he covariance of Indonesian excess reurns wih Japan, or cov(r in,,r jp, ), and posiively on he covariance wih U.S. excess reurns, or cov(r in,,r us, ). Japanese excess reurns receive volailiy from Malaysia, and ransmi volailiy o Korea in he precrisis period. Similarly, U.S. volailiy ransmis o he Taiwanese marke in he same period. When he enire sample is considered, Malaysia ransmis volailiy o Japan, which ransmis i o he Unied Saes. Boh Japan and he Unied Saes ransmi volailiy o Indonesia. Japan receives a considerable volailiy effec from Malaysia hrough cov(r ma,,r jp, ) in boh sample periods. This finding generally conrass wih he lieraure, in which developed markes have a major effec on emerging markes, bu no he oher way around. These volailiy ransmission pahs are summarized in Figure 1. Despie he lieraure, our model demonsraes ha here was some inerdependence in volailiy beween emerging markes and developed markes before and afer he Asian crisis. The covariance erms imply a shockwave ha raveled hrough he differen financial markes. Evidence from Bivariae GARCH-M Models This secion uses he bivariae GARCH-in-mean model o examine volailiy spillover effecs from one Asian emerging marke o anoher: Thailand, he Philippines, Indonesia, Malaysia, Korea, and Taiwan. There are fifeen separae regressions, wih eigh parameers in he condiional mean equaion and eleven in he condiional variance covariance equaion for each regression. Since he six emerging markes are approximaely in he same geographical region, we are no concerned wih asynchronous rading, and do no include lagged disurbance erms. Resuls for he Philippines Thailand model are given 5 in Table 2. The mean equaions show ha he inercep parameers overall are negaive in sign, bu saisically insignifican for all markes. The significance of he α coefficiens suggess ha all markes, excep Taiwan, exhibi firs-order serial correlaion. Perhaps mos ineresing, ime-varying variance in he respecive sock marke is no he only imporan source of variaion in he sock excess reurns. Overall, he value of he λ 1, he condiional variance coefficien, ends o have he expeced posiive sign. For he covariance, he Thai excess reurns do no depend on any oher Asian emerging sock markes behavior, hough a he same ime, he Thai marke does apparenly cause posiive volailiy hrough cov(r h,,r ph, ) in he 01 dibooglu.pmd 13

10 14 EMERGING MARKETS FINANCE AND TRADE Figure 1. The Pahways of Volailiy Transmissions in he Trivariae Model Philippine marke during he pos financial crisis period in Asia a he 10 percen level. This is srong evidence for he belief of rapid spread of he fallou from Thailand o neighboring counries during he Asian crisis. In addiion, over he pre financial crisis period in Asia, he Philippine and Taiwanese markes receive volailiy from each oher hrough cov(r ph,,r w, ). The Philippine marke ransmis volailiy o he Korean marke hrough cov(r ph,,r ko, ). The Korean marke also receives volailiy from he Taiwanese marke, and ransmis i back in urn, hrough cov(r ko,,r w, ), bu he influence appears o be weak. Finally, he Malaysian marke receives volailiy hrough cov(r in,,r ma, ) and cov(r ma,,r w, ). These resuls are evidence of inerdependence among he six emerging markes in Asia, even before he crisis. For he condiional mean equaions over he exended sample period, he saisics show a number of ineresing resuls regarding he covariance erms. The expeced excess reurns on he Malaysian and Taiwanese marke are srongly influenced by he Malaysian excess reurns hrough cov(r ma,,r ko, ) and cov(r w,,r ko, ) respecively. The Taiwanese marke ransmis volailiy hrough cov(r in,,r w, ) o he Indonesian marke. The Malaysian marke ransmis volailiy hrough cov(r in,,r ma, ) o he Indonesian marke; a same ime, is expeced excess reurns depend on Indonesian volailiy hrough cov(r in,,r ma, ). The pahways of volailiy ransmission are given in Figure 2. We also esimae bivariae models for daily sock excess reurns among he six emerging markes from January 1, 1997 o December 31, The resuls are given in Panel C of Figure 2. There is srong evidence of conagion afer he crisis. The Thai sock marke s volailiy spillover suggess ha i has played an increasingly imporan role in he Asian sock markes afer is mid-1997 fallou. The emerging markes also seem o be highly conneced o regional capial markes. 01 dibooglu.pmd 14

11 MARCH APRIL Table 2 Esimaes from he Bivariae GARCH-M Model wih Philippines and Thailand Esimaes of he coefficiens of he condiional excess reurns rd, =λ d +α dd r +λd ω f hd+λd ω f rd r +ε 0, 1 (1 1, ), 2, cov(,, f, ) d, r =λ +α r +λ ω h +λ (1 ω ) ω cov( r, r ) +ε f, f0 f f, 1 1 f f, f, f2 f, d, d, f, f, Before he Asian crisis Exended sample (January 5, 1994 o (January 5, 1994 o 2/31/96) December 31, 1999) <<confirm monh / December mean?>> Philippines Thailand Philippines Thailand λ (0.16) ( 1.34) ( 0.47) ( 1.19) α (5.12)** (2.07)* (7.86)** (4.81)** λ ( 0.10) (0.57) (2.12)* (1.04) λ (0.32) (1.19) (1.70)*** ( 0.09) Esimaes of he coefficiens of he variance covariance marix H [ ] [ ] [ ] [ ] [ ] = P P + F H 1 F + G ε 1 ε 1 [ G ] ( ) wih = hf, cov rd,, rf, H ( ) cov r, r h d, f, d, <<above equaion / should prime follow one of he [ε 1 ]?>> P (0.34) (0.02e 2 ) P (11.15)** ( 0.22) P (8.62)** ( 0.16) G ( 1.84)* (14.94)** G ( 2.97)** (14.41)** G (8.24)** (15.12)** G (8.69)** ( 0.18) F ( 9.94)** (5.11)** F (3.31)** (26.32)** F (4.98)** (17.28)** F ( 15.05)** ( 6.32)** Noes: Daily Thai and Philippine excess reurns are calculaed in local currency: f = Thailand, d = Philippines. Porfolio weighs reflec relaive size of he wo markes. Numbers in parenheses are -saisics. *** Saisically significan a he 10 percen level. ** Saisically significan a he 1 percen level. * Saisically significan a he 5 percen level. 01 dibooglu.pmd 15

12 16 EMERGING MARKETS FINANCE AND TRADE Figure 2. The Pahways of Volailiy Transmissions in he Bivariae Model 01 dibooglu.pmd 16

13 MARCH APRIL Our resuls indicae ha he reurn comovemens among Eas Asian sock markes were srong prior o he Asian crisis, and coninued unabaed afer he Asian crisis. These resuls are broadly in line wih Yang and Lim (2004). Moreover, here are conagion effecs in he region, despie capial conrols imposed by some counries, such as Malaysia. Finally, he significance of he diagonal elemens of he [F] and [G] marices indicaes ha GARCH effecs are prevalen and srong. On he oher hand, he assumpion of cross-marke effecs can be confirmed by he high degree of significance of he off-diagonal elemens. This high degree of significance is consisen wih he resuls of Hamao e al. (1990), who show ha he cross-marke effec canno be negleced. This empirical finding confirms he esimaion resuls from he condiional mean equaions. Conclusions We examine volailiy spillovers in Souheas Asian emerging sock markes in he conex of he mid-1997 financial crisis, using a mulivariae GARCH process wih BEKK parameerizaion o model he volailiy of excess reurns. This procedure reflecs he well-known auoregressive behavior in volailiy series, and accouns for spillover effecs beween various equiy markes. The significan degree of hese effecs can reveal he relaive size and openness of a paricular marke. The excess reurns exhibi firs-order serial correlaion, which can be explained by insiuional facors. The effec of nonsynchronous rading hours is found o have a significan effec in explaining index reurns. In addiion, resuls indicae significan foreign influences on he ime-varying risk premiums in all specificaions and models. Similarly, he bivariae GARCH-M model provides srong evidence of reacions among he six neighboring markes in Souheas Asia. The sudden fallou in Thailand seems o have played an imporan role in he variaion in excess reurns in oher Souheas Asian markes. This suppors he idea of he Asian conagion, suggesing ha he crisis sared in Thailand and spread o oher financial markes. Noes 1. We use conagion in he broad sense, including cross-counry ransmission of shocks or cross-counry spillover effecs. In our model, spillovers are indicaed by significan crosscounry covariance erms. For alernaive definiions and a brief survey, see Yang and Lim (2004). 2. For deails on asynchronous rading, see Chan e al. (1992), Wei e al. (1995), and Kim e al. (2000). 3. Resuls for he Unied Saes and Japan ogeher wih each of he following Souheas Asian counries are deailed in ables 3 7 in an appendix, available from he auhors upon reques: he Philippines, Indonesia, Taiwan, Malaysia, and Korea. 4. An exensive discussion can be found in Scholes and Williams (1977) and in Cohen e al (1986). 01 dibooglu.pmd 17

14 18 EMERGING MARKETS FINANCE AND TRADE 5. Resuls for all oher possible pairwise combinaions of counries are deailed in ables 8 21 of he appendix, available from he auhors upon reques. References Baba, Y.; R.F. Engle; D.F. Kraf; and K.F. Kroner Mulivariae Simulaneous Generalized ARCH. Working Paper, Universiy of California, San Diego. Bollerslev, T.; R.F. Engle; and J.M. Wooldridge A Capial Asse Pricing Model wih Time-Varying Covariance. Journal of Poliical Economy 96, no. 1 (February): Chan, K.C.; G.A. Karolyi; and R.M. Sulz Global Financial Markes and he Risk Premium on U.S. Equiy. Journal of Financial Economics 32, no. 2 (Ocober): Charumilind, C.; R. Kali; and Y. Wiwaanakanang Conneced Lending: Thailand Before he Financial Crisis. Journal of Business 79, no. 1 (January): Cohen, K.; G. Hawawini; S. Maier; R. Schwarz; and D. Whicomb The Microsrucure of Securiy Markes. Englewood Cliffs, NJ: Prenice Hall. French, K.; W. Schwer; and R. Sambaugh Expeced Reurns and Volailiy. Journal of Financial Economics 19, no. 1 (Sepember): Hamao, Y.; R.W. Masulis; and V. Ng Correlaions in Price Changes and Volailiy Across Inernaional Sock Markes. Review of Financial Sudies 3, no. 2 (Summer): Jeon, B.N., and B. Seo The Impac of he Asian Financial Crisis on Foreign Exchange Marke Efficiency: The Case of Eas Asian Counries. Pacific-Basin Finance Journal 11, no. 4 (Sepember): Kim M.; A. Szakmary; and I. Mahur Price Transmission Dynamics beween ADRs and heir Underlying Foreign Securiies. Journal of Banking and Finance 24, no. 8 (Augus): Nagayasu, J Currency Crisis and Conagion: Evidence from Exchange Raes and Secoral Sock Indices of he Philippines and Thailand. Journal of Asian Economics 12, no. 4 (Winer): Scholes, M., and J. Williams Esimaing Beas from Nonsynchronous Daa. Journal of Financial Economics 5, no. 3 (December): Wei, K.C.J.; Y.-J. Liu; C.-C. Yang; and G.-S. Chaung Volailiy and Price Change Spillover Effecs Across he Developed and Emerging Markes. Pacific-Basin Finance Journal 3, no. 1 (May): Yang, T., and J.J. Lim Crisis, Conagion, and Eas Asian Sock Markes. Review of Pacific Basin Financial Markes and Policies 7, no. 1 (March): dibooglu.pmd 18