Measuring Financial Contagion Between Emerging Equity Markets Before and After The Onset of The Global Financial Crisis

Measuring Financial Contagion between emerging equity markets before and after the onset of the global financial
crisis
MSc Financial Services 2013
James Fitzsimons 12012173
Word Count: 11,491
Supervisor: Fergal OBrien
This dissertation is solely the work of the author and submitted in partial fulfilment of the requirements of the MSc in Financial Services.
Abstract
This thesis attempts to measure both the extent and determinants of financial contagion across 17 emerging equity markets from Latin America and Asia both before and after the onset of the global financial crisis. The methodology employed is a continuation of the approach utilised by Bae et al. (2003) which captured the coincidence of extreme return shocks across national stock indices both within and across emerging market regions. The data used is that of daily returns over an 11 year period (January 2002- December 2012) which is divided approximately into separate time series data to analyse returns both before and after the onset of the financial crisis as well as for the total 11 year period. The extent of contagion is illustrated and its determinants are characterized using a binary logistic (logit) regression model.
This work illustrates that the correlations between all the equity markets analysed increased after the onset of the global financial crisis, as did the frequency of extreme return shocks, and that negative return shocks are more widespread than positive shocks. It is also found that contagion is far more prevalent in Asia than in Latin America and that certain countries within both regions display return shocks that are unique within their respective regions. Furthermore it is evident from the logit regression analysis that broad market indicators show a weak relationship with extreme returns in emerging equity markets suggesting that contagion is not easily predicted and is a separate phenomenon from factors indicative of economic performance.
Acknowledgements I would like to thank James Ryan, Fergal OBrien, Adam OReilly, and my entire family. All of whom have provided substantial guidance, support and encouragement which were essential in making this thesis possible.
Table of Contents
1. Introduction ......................................................................................................................................... 5 2. Literature review ................................................................................................................................. 8 3. Data ................................................................................................................................................... 15 3.1 Asian markets.......................................................................................................................... 16 3.2 Latin American markets .......................................................................................................... 16 3.3 Broad market indicators (3-month Treasury Bills, US Dollar, and the VIX) ......................... 16 4. Methodology ..................................................................................................................................... 17 4.1 Returns .................................................................................................................................... 17 4.2 Summary Statistics.................................................................................................................. 17 4.3 Exceedances (extreme returns) ............................................................................................... 18 4.4 Binary logistic regression........................................................................................................ 18 4.5 Summary of the methodology ................................................................................................. 20 5. Results ............................................................................................................................................... 21 5.1 Summary Statistics.................................................................................................................. 21 5.2 Total period summary statistics .............................................................................................. 21 5.3 The pre-crisis period summary statistics ................................................................................. 24 5.4 The post-crisis period summary statistics ............................................................................... 27 5.5 Negative exceedances over the total 11 year period ............................................................... 30 5.6 Positive exceedances over the total 11 year period ................................................................. 32 5.7 Negative exceedances during the pre-crisis period ................................................................. 34 5.8 Positive exceedances during the pre-crisis period .................................................................. 35 5.9 Negative exceedances during the post-crisis period ............................................................... 37 5.10 Positive exceedances during the post-crisis period ............................................................... 38 5.11 Regression results ................................................................................................................. 40 6. Discussion ......................................................................................................................................... 53 7. Conclusion ........................................................................................................................................ 55 Bibliography ......................................................................................................................................... 56 Appendix 1: Binary logistic regression output ..................................................................................... 58 Appendix 2: Asian equity markets ........................................................................................................ 70 Appendix 3: Latin American equity markets ........................................................................................ 72 Appendix 4: US and European equity markets ..................................................................................... 74 Appendix 5: Broad market indicators ................................................................................................... 75
1. Introduction Financial contagion is usually viewed as the spreading of a financial crisis from one country to another. The topic has been one of the most widely debated in international finance since the Asian financial crisis of 1997. Despite the lack of agreement over the causes and the most appropriate metric of contagion, there is widespread agreement on which particular extreme market events are considered to be instances of contagion. The Mexican Tequila effect of 1994, the Asian crisis of 1997, the Russian default of 1998, the Brazilian sneeze of 1999 and the NASDAQ rash of 2000 are all agreed upon as events where financial contagion between countries has occurred (Rigobon, 2002). The global financial crisis 2007 to 2009 is an example of financial contagion that is perhaps more vivid in the memories of most.
In the latter half of the 20th century, increased capital mobility enabled funds to flow far more rapidly between markets than had previously been possible. Far reaching financial deregulation suddenly made available pools of funding from foreign sources. Emerging markets became the destination of choice for much of this funding as international investors sought to diversify into foreign markets. This undoubtedly provided benefits in that firms were no longer restricted by domestic credit limitations and could now avail of foreign credit. However the rapid increase in financial flows between countries created a heightened risk of instability for multiple economies as the financial system grew evermore integrated. Furthermore, the increased interdependence that developed between countries throughout the globe led to greater exposure to financial contagion (Candelon, 2005).
The Asian financial crisis of 1997 was a typical example of financial contagion at its worst. A currency crisis that started in Thailand suddenly spread throughout Asia sending shock waves throughout the world. Fears of a global recession ensued and the crisis was eventually quelled due largely to the intervention of the IMF. The event highlighted both the extent and rapidity of financial contagion in developing economies and provided the motivation for widespread research on financial contagion to better understand the phenomenon. It also led many experts to infer that developing countries like those ensnared by the Asian crisis were more susceptible to financial instability than the economies of the developed world (Bae et al., 2003).
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Despite the widespread attempts to characterise and measure contagion, research on the topic has yielded mixed results. One prevalent problem in particular is that in the existing research much of the focus has leaned heavily on the analysis of the correlation coefficients between markets. The problem with analysing correlations is that the true relationships between markets are not always reflected accurately. This is because the correlations are influenced heavily by the vast majority of the days in a data set in which there are no extreme events at all. Isolating the extreme events and measuring the true contagiousness between markets was therefore not well reflected by correlations alone which simply measure the strength of relationships generally. Correlations that give equal weight to small and large returns are not appropriate for an evaluation of the differential impact of large returns. The true impact of large returns is hidden in correlation measures by the large number of days when little of importance happens (Bae, 2003, 719).
This problem was tackled by Bae et al. (2003) when they introduced a new approach to measuring contagion which focused on the occurrence and coincidence of extreme returns rather than on correlations. This methodology required isolating and measuring the occurrence of extreme positive and negative returns. This created a methodology by which they avoided having a situation where results are dominated by a few observations, we do not compute correlations of large returns, but instead measure the joint occurrences of large returns. (Bae, 2003, 719). In other words, by isolating extreme events on the marginal distribution of returns it is then possible to measure the joint occurrence of extreme market events across different markets without having to use any analysis of correlation coefficients which are wrought with statistical obstacles. A time series of returns data from various national stock markets can be used to analyse such joint occurrences between countries.
Bae et al.s research was based on eight years of daily stock indices returns during the 1990s (1992-2000). This thesis uses a more recent data set from the same emerging markets which incorporates approximately a five and half year period both before and after the onset of the global financial crisis (January 2002-December 2012) with the date of June 15th 2007 used as the cut off point for the pre-crisis and post-crisis analysis. The data and results are therefore
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broken up into three segments. These segments are the total 11 year period, the pre-crisis period, and the post-crisis period. The results are summarised into tables representing their respective periods. The extreme positive and negative returns are measured separately and illustrated in tables for the differing time periods.
A binary logistic regression model is used to further characterise the determinants of the extreme returns. It is similar to that employed by Boyson et al. (2006) in which the relationship between hedge funds and variables representing broad economic performance is assessed. In this thesis, the dependent variable used in the model is representative of extreme returns across a particular region while the explanatory variables are representative of the broad market indicators of interest rates, exchange rates, and market volatility. The model is useful for predicting extreme events based on contemporaneous movements in these broad market indicators. The model tests for the determinants of both positive and negative contagion in Asia and Latin America and is furthermore split into the three different time periods.
This thesis is motivated largely by the fact that Bae et al.s approach to measuring financial contagion has not yet been applied to a more recent and turbulent time period. Whereas Bae et al.s work examined contagion in the 1990s; this work examines the last eleven years (January 2002- December 2012) of daily returns on stock indices from emerging markets and furthermore dissects the data in light of the global financial crisis. The binary logistic regression model further characterises contagion within Asia and Latin America. The following literature review will illustrate part of the existing research that has been carried out on the subject of measuring financial contagion and the different methodologies and conclusions which have been drawn.
2. Literature review The predominant theme emanating from the existing literature on the subject of financial contagion indicates that the origins of the phenomenon are not well understood. More specifically the channels by which market shocks spread from one country to another and how such flows can be measured remain unclear. Both the methodologies used and the approaches taken have often focused on the analysis of correlation coefficients of stock returns which has yielded mixed results to date. Other alternative approaches which move away from a reliance on correlations have also led to greater ambiguity surrounding the subject. Below is an exploration of the literature on financial contagion which has attempted to define, measure, and explain a subject area which has proved to be a significant challenge for the academic community.
Rigobon (2002) illustrated the difficulties that are widespread on the subject and discussed the most commonly used methodologies on the phenomenon which are linear regressions, logistic regressions and tests on returns correlations. He highlighted the three most common problems that have prevailed in the data which have been used in such research (data such as stock market returns, interest rates, exchange rates, or linear combinations of these). The three problems are simultaneous equations, omitted variable biases (as there is a lack of consistent and compatible data) and heteroskedasticity (caused by volatility increases during crisis periods thus making analysis correlation coefficients difficult). Much of the research outlined below has attempted to address the issue of measuring contagion and furthermore overcoming the hurdles highlighted by Rigobon.
One such attempt was made by Forbes et al. (2001). They attempted to define and measure financial contagion. Their work highlighted the fact that although its existence is widely accepted, the definition and interpretation of contagion is unclear. They stated that any continuation of cross-linkages that are present during stable market periods cannot be classified as contagion. For contagion to occur, stock market shocks that occur in different markets at the same time need to be the result of some other unique link between them that is absent during normal market periods. Thusly contagion was defined as a significant increase in such cross-market linkages when shocks occur simultaneously across countries. They
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classified increases in correlation as indicative of interdependence and increases in comovements as increases in contagion. By establishing a workable definition for contagion, this work evaluated prior research carried out on the subject and concluded that there was no evidence of contagion and instead found evidence of interdependencies between markets.
Similar findings were made by Candelon et al. (2005) who attempted to measure financial contagion by analysing the Hong Kong stock market crisis (1st Jan 1996 to 31st December 1998) and the Mexican stock market (1994, Peso Crisis) during these turbulent market periods. Their methodology focused on an analysis of co-movement according to recurrent common economic cycles. Candelon et al. inferred that large cross-market shocks are not unique occurrences in their own right but rather a continuation of linkages that are already in existence during more stable market periods. This finding suggested that return shocks are spread through non-crisis related channels such as those associated with trade, policy coordination and random shocks. This conclusion tends to favour the interdependencies inferred above by Forbes et al. (2001) however the methodology used was criticised by Corsetti et al. (2005) who stated that such an approach creates a bias towards the null hypothesis of interdependence.
Corsetti et al. (2005) examined the international effects of the 1997 Hong Kong stock market crisis on a sample of 17 countries. Their approach investigated previous research including that of Forbes et al. (2001) which suggested evidence of interdependence rather than contagion. Corsetti et al. outline a critique of the previous work by suggesting that much research had taken the variance of stock returns in the market where a crisis has originated as a proxy for the volatility affecting all other markets. This failure to distinguish between common and country-specific elements of returns data creates a bias towards there being no contagion. Corsetti et al. therefore used a model of interdependence that did not create an imposition on the variance of common factors relative to the variance of country-specific shocks.
Corsetti et al.s (2005) findings suggested that the conclusion from much of the previous research on contagion, that interdependence between countries is evident rather than
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contagion, is the result of arbitrary assumptions regarding the country-specific variance in the market where the crisis originates. These assumptions thusly bias tests towards the null hypothesis of interdependence. Corsetti et al. found evidence that for at least 5 of the 17 countries analysed there was little evidence of interdependence. However their findings also suggested that country-specific noise cannot be disregarded when testing for transmission mechanisms of shocks. This work therefore created further questions over the measuring of contagion and the need for alternative methods to be developed. Karolyi (2003), for example, outlined an alternative approach which attempted to overcome some of the difficulties involved.
Karolyi (2003) researched the various definitions of financial contagion across both the academic literature and the interpretations by the mass media on the subject. Karolyi then compared these definitions to the empirical evidence on international capital flows and asset prices. He found that the existence of financial contagion between markets was not as extensive as many researchers and commentators had inferred. Karolyi found that there have been limitations to much of the research on contagion as it had focused largely on the correlations between markets. The problem with simply analysing correlation coefficients is that they provide an equal weighting for small and large changes in returns. This excludes an evaluation on the uniqueness of large returns. Karolyi highlighted that there had been little research that attempted to solve this issue of correlation analysis and furthermore stated that even the research that had employed alternative statistical methods to measure financial contagion had not controlled for economic fundamentals. Karolyi claims that Bae et al. (2003) created a new measure of contagion that had addressed these problems.
Bae et al. (2003) did this in three ways. Firstly they focused specifically on measuring extreme events which are considered to be returns that lie in the top or bottom 5% of the marginal distribution of returns. By isolating these extreme events, they could measure the occurrence of shared extreme events between markets referred to as co-exceedances (Karolyi, 2003, 194). Secondly they did not focus on correlations but on the conditional probabilities of these co-exceedances. Thirdly they used a multinomial logistic regression model to measure the probability of shared extreme returns or co-exceedances occurring. The benefits of this model were that it allowed for explanatory variables that characterise the
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likelihood of extreme return shocks such as changes in interest rates, exchange rates and market volatility. They also used contagion in different regions as explanatory variables. They found that there was little evidence of contagion across regions as the model showed low significance figures where co-exceedances in one region were used to explain coexceedances in another.
Other approaches had been continuously developed such as the case with Iwatsubo et al. (2007) who focused their research on measuring contagion between the US and Asian markets. This was done by analysing the returns of 22 dually-traded stocks of Asian firms (Asian firms with stocks traded both on the NYSE and in their home countries). This methodology was useful in that it could distinguish between contagion and fundamentalsbased (2007, p217) stock price co-movement for markets which traded non-synchronously in separate time zones. This approach could thusly control for the fundamental factors inherent in the stock prices and identify the role of other factors such as an individual countrys stock index.
They found that there were significant bilateral contagion effects in both returns and returns volatility. Secondly, that contagion effects from the US to Asia were stronger than in the opposite direction. This suggested that the US may play a major role in the transmission of contagion in financial markets. Thirdly, they found that the intensity of the contagion was greater during the Asian crisis of 1998 than afterwards. These findings were somewhat contradictory to that of Diebold et al. (2009) which suggested that there was a significant disparity between the transmissions of returns compared to transmissions of volatility between equity markets.
Diebold et al. (2009) provided a simple measure of linkages between equity markets by measuring interdependence of weekly asset returns and/or volatilities from 7 developed and 12 emerging equity markets by constructing a Spill over Index. Similar to Bae et al. (2003), extreme events (in this case extreme returns and extreme volatility) were isolated and measured in order to illustrate the characteristics of such events. They measured return spillovers as separate to volatility spillovers and included time periods which accommodated
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periods of both market stability and market turmoil (the time-series of returns data ranged from January 1992 to November 2007). They furthermore identified trends and sudden bursts in the occurrence of these spillovers.
They found that there existed an extreme divergence between the characteristics of returns and volatility spillovers. Returns spillovers displayed a gradually increasing trend without any bursts in the occurrence of such spillovers, which may perhaps be explained by the increased financial integration which took place over the last 15 years. Contrastingly, volatility spillovers displayed no trend whatsoever but rather clear bursts that can be readily associated with turbulent market periods. This finding raised the question of why there existed such a stark contrast between returns and volatility spillovers. Diebold et al.s work had therefore raised further questions surrounding interdependence, more specifically contagion, and how this can be identified, measured and understood.
Further attempts to measure contagion include the work of Chiang et al. (2007) who used a conditional correlation model on 9 Asian stock market returns data from 1996 to 2003. This model was a multivariate GARCH model which was appropriate for measuring the timevarying conditional correlations between countries. This model enabled Chiang et al. to address the heteroskedasticity problem highlighted above by Rigobon without dividing the time-series data into two sample periods. Chiang et al. furthermore employed the same model on lagged US stock returns as an exogenous factor in order to further address the omitted variable problem also outlined by Rigobon (2002).
Chiang et al. (2007) identified two phases in the Asian financial crisis; the first took place in the early weeks of the Asian crisis and showed an increase in correlation, which they classified as contagion, as increasing volatility spread from the earliest crisis-effected countries to other countries. The investor activity here was governed mainly by local (within the country) information. The second phase began at the end of 1997 through to 1998 as awareness of the crisis became more widespread internationally. This second phase showed a continued heightened correlation between stock returns and their volatility (which they classified as herding). The statistical analysis applied to correlation coefficients indicated that
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there was a significant shift in variance throughout the crisis period which suggested that the benefits to international diversification may be somewhat limited. They also found evidence that changes sovereign credit-ratings had a significant effect on the dynamic correlations within the markets analysed. This work found evidence that Investor behaviour and creditrating agencies therefore play a significant role in the transmission of contagion between countries.
Other research on contagion that departed from the analysis of correlation coefficients was undertaken by Pritsker (2001). This work took a theoretical approach to studying the channels through which contagion may have spread and factors which may have made a country susceptible to contagion. These channels were sector, financial market, and financial institution linkages. The interaction between markets and financial institutions was seen as a possible originator for a tightening of liquidity and a flight by investors to safer assets. However Pritsker admited that the channels through which shocks spread from one country to another were not well understood and that this failure to identify such channels through which shock propagations flow illustrated the need for further research. Pritsker admited that his work had barely scratched the surface in terms of modelling propagation (2001, p20) and a need to develop theoretical models which can be tested was essential to developing a more in-depth understanding of contagion.
Another alternative approach was undertaken by Goldstein et al. (2004) who examined the role that investors played in the contagion of market shocks between countries rather than attempting to measure contagion itself. This was done by developing a theoretical model of 2 countries with independent fundamentals but with the same group of shared investors, the rationale being that each country may be susceptible to a self-fulfilling crisis as investors may withdraw their capital from a country fearing that other investors will do the same. In other words, a crash in one country will make an investor risk-averse and may thusly lead to that investor withdrawing their investments from the second country. When this occurs, there is a positive correlation between the returns of the two countries and thusly an increase in contagion. The mechanism that generated contagion in their model was based on a wealth effect. This model found that decreases in the wealth of investors in one country increased the likelihood of a negative shock occurring in the second country. Although Goldstein et al.
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provided a possible explanation for contagion they provided little in terms of a framework by which contagion could be measured.
It is clear from the literature outlined above that there remains a great difficulty in understanding the causes of contagion and furthermore measuring its occurrence. Both the focus and methodologies within the previous research on contagion have been varied with the analysis of correlation coefficients being the most popular area of focus. Despite the extensive work, it appears that a definitive framework is still an allusive target. Further research is this area is therefore likely to remain a contentious area of research for the foreseeable future. This thesis attempts to contribute to the existing literature by measuring contagion using the unique approach of Bae et al. (2003) whose alternative methodology moves away from an over-reliance on correlation analysis. The time-series of data used in the analysis will incorporate a more recent and lengthier time-period taking account of the global financial crisis.
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3. Data The purpose of this thesis is to try measure the occurrence and explain the determinants of financial contagion between emerging equity markets. A similar data set to that which was analysed by Bae et al. (2003) of daily stock market returns is used except that in this thesis, the data is more recent and extends over a greater time period. This time-series of data is furthermore split into two parts to enable an analysis of the pre and post financial crisis period as well as the total time period. This section will outline the data used and the rationale for its inclusion in this work.
To try and accurately capture the characteristics of developing economies stock indices from 17 different countries from across Latin America and Asia were chosen. These stock indices are representative of the largest publicly traded firms by market capitalisation within each economys equity market. They are also reflective of stocks that are accessible to foreign investors which is a key element required for measuring the spreading of cross-border extreme returns shocks as; a number of explanations of contagion are based on the actions by foreign investors (Bae, 2003, 721). Daily returns were used as these are the most sensitive to any sudden shocks that may occur.
Roughly eleven years of daily returns from 2nd January 2002 to 28th December 2012 were used (2868 observations). In addition to the stock indices of the emerging markets chosen, the US (S&P 500) and Europe (Stoxx Europe 600) were added to provide a control for the extent to which contagion can also impact on developed markets. The daily closing prices of the selected stock indices for the chosen time period were downloaded from the Bloomberg interface and the returns were then calculated. The data set of returns was arbitrarily divided into two segments of approximately five and a half years each which were used for the pre and post financial crisis analysis (pre and post 15th June 2007) as well as for the total 11 year period.
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3.1 Asian markets To capture the developing equity markets of Asia the following countries were included; China (CSI 300), Korea (KOSPI), Philippines (PCOMP), Taiwan (TWSE), India (S&P SENSEX), Indonesia (JCI), Malaysia (KLCI), Pakistan (KSE 100), Sri Lanka (CSEALL), and Thailand (SET). See Appendix 2 for detailed explanation of these markets. 3.2 Latin American markets Similarly, to capture the developing equity markets of Latin America the following countries were included; Argentina (MERVAL), Brazil (IBOV), Chile (IPSA), Colombia (IGBC), Mexico (MEXBOL), Peru (IGBVL), and Venezuela (IBVC). See Appendix 3 for detailed explanation of these markets. 3.3 Broad market indicators (3-month Treasury Bills, US Dollar, and the VIX) For the binary logistic regression model it was necessary to use explanatory variables that were representative of broad market performance. These variables were therefore representative of interest rates, exchange rates, and market volatility. The variable used for interest rates were 3-month Treasury Bills. For exchange rates a US Dollar index that values the US Dollar against a basket of major world currencies was used. Finally for market volatility, the VIX was used as a measure of implied future volatility. See Appendix 5 for detailed explanation of these variables.
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4. Methodology The methodology below consists of the calculation of returns, summary statistics, extreme returns (exceedances) as well as the coincidence of such returns across different countries, and finally the implementation of a binary logistic regression model. The data used in this research consists of the daily closing prices of stock indices from 17 emerging and 2 developed equity markets. In addition to these equity markets, both a Latin American and an Asian index have been constructed in order to give an average for each region when calculating the summary statistics. The purpose of these additional indices is to provide a clearer picture of the returns characteristics both within and across regions. The splitting of the data into a pre and post financial crisis (i.e. before and after the 15th June 2007) setting helps illustrate the impact that the crisis has had on the correlations of returns, on the occurrences/joint occurrences of extreme returns, and finally on the characterisation of the determinants of contagion.
4.1 Returns From the aforementioned data, daily returns were constructed. The 11 years of returns (totalling 2868 observations) were divided approximately into two for the pre and post financial crisis analysis. The pre-crisis period is from 2nd January 2002 to the 15th June 2007 (1422 observations), whereas the post-crisis period ranges from the 18th June 2007 to the 28th December 2012 (1446 observations).
4.2 Summary Statistics Following the calculation of returns, summary statistics were computed for each of the three time periods (total period, pre-crisis, and post-crisis). These summary statistics include the mean, standard deviation, median, minimum, and maximum. The summary statistics also include a correlation matrix for all of the returns analysed.
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4.3 Exceedances (extreme returns) After the computation of the summary statistics, the occurrences of extreme positive and negative returns as well as the joint occurrences of such returns were measured. The 95th and 5th percentiles of the marginal distribution of returns are chosen as the boundaries that define extreme positive and negative returns respectively. Positive returns were treated separately from negative returns and were therefore measured separately. The exceedances of individual countries as well as the coincidences of exceedances shared between countries were calculated over the three distinct time periods (pre-crisis, post-crisis, and total 11 year period). Where an exceedance occurred, a dummy variable of 1 was attributed and for all other observations a 0 was given where no extreme event had occurred. 4.4 Binary logistic regression In attempting to characterise the determinants of contagion a binary logistic (logit) model was used. This model was similar to that used by Boyson et al. (2006) and examined the relationship between extreme returns within each region and on several broad market variables. These variables were reflective of market performance globally and therefore provide a useful measure by which contagion could be assessed. The total number of exceedances experienced within a region was used as the dependent variable while the broad market indicators of interest rates (3 month Treasury Bills), exchange rates (US Dollar exchange rate against a basket of major world currencies), and market volatility (VIX) were used as the independent or explanatory variables.
The logit regression model was implemented over the three distinct time periods of the precrisis period, the post-crisis period, and the total 11 year period. The purpose of this was to attempt to characterise the determinants of contagion within the two emerging market regions analysed and to furthermore illustrate any changes in such determinants that may be evidenced in light of the global financial crisis. The positive and negative exceedances were analysed separately.
In the logit model, the unobserved continuous variable, Z, represented the propensity towards an extreme return shock occurring and therefore larger values of Z indicated a higher
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probability of this shock occurring.
The following function describes the relationship
between Z and the probability of an extreme return shock;
Or
Where; Is the probability the ith case experiences an extreme return shock. is the value of the unobserved continuous variable for the ith case.
The logit model assumed that the unobserved continuous variable Z had a linear relationship with the explanatory variables of interest rates, exchange rates, and market volatility. This is illustrated as follows; = Where is the jth predictor for the ith case is the jth coefficient P is the number of predictors Due to the fact that Z is an unobserved variable, a simple linear regression did not suffice as such a regression model would produce an output that was difficult to interpret as the dependent variable of exceedances within a region are categorical (exceedance or no exceedance i.e. 1 or 0). It was therefore necessary to relate the explanatory variables to the probability of an exceedance by substituting for Z; = The coefficients in the logit model were estimated through an iterative maximum likelihood.
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The Hosmer and Lemeshow test were used to test for the models predictive abilities. In this test, weaknesses in the predictive abilities of the model are sought. It was therefore preferable for this test to be incorrect. Due to this, it was preferred that the p-values were greater than .05 as p-values lower than this indicated that the model was a poor predictor.
4.5 Summary of the methodology The summary statistics provide a preliminary outline of the relationship between all of the equity markets analysed. The analysis was then taken further in the calculation of both positive and negative extreme returns (exceedances). The occurrences as well as the joint occurrences of extreme returns between markets were measured providing an alternative illustration of contagion across Asia and Latin America. The total amount of exceedances to occur within Asia and Latin America were used as the dependent variables when the binary logistic model was run separately for both regions. This was done for positive and negative exceedances separately providing a characterisation of exceedances against the broad market indicators outlined above. All of the aforementioned methods were employed over the 3 different time periods to illustrate the impact that the global financial crisis has had on contagion.
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5. Results 5.1 Summary Statistics The summary statistics illustrated that there was an enormous increase in the correlations both within regions and across regions after the onset of the global financial crisis. In most cases the correlations more than doubled. 5.2 Total period summary statistics The summary statistics for the total period (Table 5.1) show the highest average return out of all the markets observed was that of Venezuela with 0.16%. Argentina had the largest standard deviation of 1.98%. Pakistan had the highest median with 0.06%. The maximum daily return experienced was by India with 17.34% while the lowest return was that of Venezuela with -18.66%. The correlations (Table 5.2) between countries were higher within regions than across regions. South Korea and Taiwan had the highest correlation in Asia of .64, while the lowest correlation in Asia was that of China and Sri Lanka with almost no relationship observed (.004). Brazil and Mexico had the highest correlation in Latin America with .68, while the weakest relationship in the same region was shared between Mexico and Venezuela (.02). The strongest relationship across the two regions was between India and Peru with a correlation of .29, while the weakest across the two regions was between Venezuela and Taiwan with a .034 correlation. Focusing solely on the correlations between developed markets and individual developing countries, the US had its weakest relationship with Sri Lanka (-0.17) and its strongest relationship with Brazil (.65). Europes strongest relationship was with Mexico (.565), while the lowest correlation it shared with an emerging market was .047 with Sri Lanka.
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Table 5.1: Summary statistics of daily returns for the total period; Standard Mean ARG BRA CHI COL 0.10% 0.07% 0.05% 0.10% Deviation 1.98% 1.82% 1.04% 1.34% 1.32% 1.53% 1.39% 1.73% 1.51% 1.28% 1.36% 1.56% 1.43% 0.77% 1.40% 1.21% 1.35% 1.32% 1.31% 0.98% 0.77% Median 0.02% 0.01% 0.04% 0.06% 0.08% 0.04% 0.00% 0.00% 0.05% 0.00% 0.00% 0.05% 0.07% 0.02% 0.06% 0.00% 0.00% 0.03% 0.04% 0.14% 0.11% Minimum Maximum -12.15% -11.39% -6.92% -10.46% -7.01% -12.45% -18.66% -13.17% -10.57% -12.27% -6.68% -11.14% -10.38% -9.50% -7.45% -12.97% -14.84% -9.03% -7.62% -6.67% -4.64% 13.42% 14.66% 12.53% 15.82% 11.01% 13.67% 10.42% 9.39% 11.95% 9.82% 6.74% 17.34% 7.92% 4.35% 8.88% 12.31% 11.16% 11.58% 9.87% 7.53% 4.44%
MEX 0.08% PER VEN CHN KOR PHI TAI IND INO 0.11% 0.16% 0.03% 0.05% 0.06% 0.02% 0.07% 0.09%
MAL 0.03% PAK SRI THA US EUR LAT ASA 0.10% 0.08% 0.06% 0.02% 0.01% 0.09% 0.06%
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Table 5.2: Correlations for total period
ARG ARG
BRA
CHI
COL
MEX
PER
VEN
CHN
KOR
PHI
TAI
IND
INO
MAL
PAK
SRI
THA
US
EUR
LAT
ASA
Pearson 1 Correlati on BRA Pearson .500 ** Correlati on CHI Pearson .414 ** Correlati on COL Pearson .334 ** Correlati on MEX Pearson .475 ** Correlati on PER Pearson .391 ** Correlati on VEN Pearson .040 * Correlati on ** CHN Pearson .101 Correlati on KOR Pearson .189 ** Correlati on PHI Pearson .127 ** Correlati on ** TAI Pearson .196 Correlati on IND Pearson .229 ** Correlati on INO Pearson .216 ** Correlati on MAL Pearson .174 ** Correlati on PAK Pearson .006 Correlati on SRI Pearson .053 ** Correlati on THA Pearson .235 ** Correlati on US Pearson .458 ** Correlati on ** EUR Pearson .426 Correlati on LAT Pearson .739 ** Correlati on ASA Pearson .270 ** Correlati on **. Correlation is significant at the 0.01 level
.533 **
.329 **
.338 **
.679 **
.550 **
.355 **
.434 **
.430 **
.341 **
.429 **
.045 *
.041 *
.083 **
.019
.050 **
.152
**
.129
**
.112
**
.120
**
.146
**
.016
.234 **
.258 **
.215 **
.262 **
.245 **
.016
.245 **
.117 **
.157 **
.174 **
.105 **
.204 **
.033
.152 **
.350 **
.175
**
.198
**
.178
**
.173
**
.203
**
.034
.219
**
.638
**
.365
**
.271 **
.263 **
.258 **
.279 **
.293 **
.002
.199 **
.398 **
.244 **
.336 **
.209 **
.262 **
.221 **
.209 **
.272 **
.025
.219 **
.463 **
.379 **
.456 **
.421 **
.155 **
.231 **
.168 **
.175 **
.255 **
.025
.241 **
.449 **
.394 **
.435 **
.332 **
.480 **
.037 *
.025
.083 **
.031
.053 **
.019
.059 **
.092 **
.093 **
.108 **
.103 **
.094 **
.113 **
.030
.080 **
.037 *
.027
.084 **
-.010
.004
.058 **
.063 **
.052 **
.053 **
.054 **
.049 **
.010
.255 **
.268 **
.213 **
.254 **
.278 **
.050 **
.201 **
.419 **
.305 **
.388 **
.385 **
.457 **
.404 **
.092 **
.060 **
.650 **
.511 **
.270 **
.704 **
.387 **
.021
.060 **
.182 **
.010
.131 **
.230 **
.115 **
.075 **
.003
-.017
.183 **
.518
**
.525
**
.374
**
.565
**
.464
**
.047
.119
**
.345
**
.178
**
.281
**
.381
**
.310
**
.272
**
.052
**
.047
.322
**
.598
**
.794 **
.691 **
.594 **
.765 **
.678 **
.264 **
.171 **
.307 **
.199 **
.254 **
.349 **
.308 **
.256 **
.054 **
.065 **
.340 **
.663 **
.637 **
.295 **
.329 **
.296 **
.293 **
.357 **
.037
.487 **
.732 **
.572 **
.703 **
.630 **
.707 **
.639 **
.315 **
.227 **
.650 **
.179 **
.408 **
.409 **
(2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
23
5.3 The pre-crisis period summary statistics The highest average daily return observed during the pre-crisis period (Table 5.3) for an emerging market was that of Peru (0.21%), while the lowest average return was experienced by Taiwan with 0.04%. The highest standard deviation was that of Argentina with 1.98%, while the lowest was that of Malaysias 0.69%. Pakistan had the highest median return (0.18%) while the lowest medians were shared by Venezuela, China, Philippines, Taiwan, and Thailand (all with 0%). The maximum daily return was Colombias 15.82% and the minimum experienced was Thailands with -14.84%. The correlation figures (Table 5.4) suggest that in the pre-crisis period, the relationships within regions were weak, though they were still stronger within regions than across. Argentina and Brazil had the strongest correlation of .281 within Latin America (although it was Brazil and Mexico for total period), while Chile and Venezuela shared the weakest relationship in the same region (.014) (although it was Mexico and Venezuela for total period). Korea and Taiwan had the strongest correlation within Asia (same for total period) with .554, while India and Sri Lanka had the weakest correlation (.000) in the same region (China and Sri Lanka during the total period). The strongest relationship across the two regions was between Chile and Korea (India and Peru for the total period) with .192, while the weakest relationship across the regions was shared between Venezuela and Sri Lanka (Venezuela and Taiwan for total period) with a correlation of -.017. The correlations between the advanced markets (US and Europe) and the emerging markets show that the US had its strongest relationship with Mexico (it was Brazil for the total period) with a correlation of .531. The US had its weakest relationship with Sri Lanka (it was the same for the total period) with a correlation of -0.28. Europes strongest relationship with an emerging market was with Mexico (.459). Its weakest relationship was with Sri Lanka with a correlation of -.014 (both were the same as for the total period).
24
Table 5.3: Summary statistics for the pre-crisis period; Standard Mean ARG BRA CHI COL MEX PER VEN CHN KOR PHI TAI IND INO MAL PAK SRI THA US EUR LAT ASA 0.15% 0.11% 0.08% 0.17% 0.12% 0.21% 0.14% 0.08% 0.07% 0.09% 0.04% 0.11% 0.13% 0.05% 0.17% 0.11% 0.07% 0.02% 0.03% 0.14% 0.09% Deviation Median Minimum Maximum 1.98% 1.66% 0.85% 1.45% 1.15% 1.09% 1.58% 1.47% 1.42% 1.16% 1.27% 1.32% 1.26% 0.69% 1.50% 1.38% 1.26% 0.98% 1.10% 0.78% 0.62% 0.09% 0.05% 0.06% 0.13% 0.11% 0.12% 0.00% 0.00% 0.08% 0.00% 0.00% 0.12% 0.09% 0.03% 0.18% 0.02% 0.00% 0.04% 0.05% 0.18% 0.12% -10.68% -6.63% -4.97% -10.46% -5.80% -7.59% -18.66% -13.17% -7.15% -7.92% -6.68% -11.14% -10.36% -4.64% -7.45% -12.97% -14.84% -4.15% -5.03% -4.54% -4.03% 13.42% 6.34% 3.00% 15.82% 6.73% 8.55% 10.42% 9.39% 7.64% 4.89% 5.64% 8.25% 5.47% 3.14% 8.88% 12.31% 11.16% 5.73% 5.80% 4.64% 2.85%
25
Table 5.4: Correlations for pre-crisis period

ARG ARG Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio Pearson Correlatio Pearson Correlatio n Pearson Correlatio Pearson Correlatio n Pearson Correlatio n Pearson Correlatio Pearson Correlatio Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson 1 BRA .281 ** CHI .228 ** COL .184 ** MEX .279 ** PER .148 ** VEN .059 * CHN .023 KOR .104 ** PHI .043 TAI .138 ** IND .104 ** INO .086 ** MAL .090 ** PAK -.021 SRI .040 THA .116 ** US .203 ** EUR .195 ** LAT .636 ** ASA .142 **
BRA CHI COL MEX PER VEN CHN KOR PHI TAI IND INO MAL PAK SRI THA US EUR LAT
.281 ** .228
**
1 .385
**
.385 ** 1 .200 ** .403 ** .153

**
.186 ** .200
**
.540 ** .403
**
.197 ** .153
**
.079 ** .014 .096 ** .027 .069

**
.097 ** .084
**
.153 ** .192
**
.062 * .063
*
.134 ** .183
**
.143 ** .131
**
.118 ** .187
**
.075 ** .141
**
.050 .000 .088 ** .027 .080

**
.008 .044 -.005 -.003 .039 -.017 -.025 .012 .028 .021 .000 .009 -.014 .013 1 .033 -.028 -.014 .025 .237 **
.166 ** .161
**
.499 ** .409
**
.325 ** .364
**
.690 ** .527
**
.206 ** .237
**
.184 ** .279 ** .148

**
.186 ** .540 ** .197

**
1 .262 ** .180
**
.262 ** 1 .202
**
.180 ** .202 ** 1 .069 ** .062 * .117 ** .150

**
.051 .080 ** .062

*
.114 ** .211 ** .117

**
.108 ** .064 * .150

**
.107 ** .157 ** .104

**
.180 ** .165 ** .143

**
.118 ** .136 ** .110

**
.079 ** .125 ** .145

**
.109 ** .189 ** .110

**
.129 ** .591 ** .162

**
.173 ** .459 ** .213

**
.538 ** .655 ** .446

**
.193 ** .232 ** .209

**
.059 * .023 .104 ** .043 .138 ** .104 ** .086 ** .090

**
.079 ** .097 ** .153 ** .062

*
.014 .084 ** .192 ** .063

*
.096 ** .051 .114 ** .108

**
.027 .080 ** .211 ** .064

*
1 -.011 -.006 .015 .016 -.005 -.001 .006 -.007 -.017 .061
*
-.011 1 .086 ** .006 .050 .043 .094 ** .129

**
-.006 .086 ** 1 .247

**
.015 .006 .247 ** 1 .223 ** .202 ** .258 ** .275 .105

**
.016 .050 .554 ** .223

**
-.005 .043 .328 ** .202

**
-.001 .094 ** .359 ** .258

**
.006 .129 ** .341 ** .275

**
-.007 .024 .058 * .105

**
.061 * .078 ** .326 ** .187

**
.049 .036 .111 ** -.013 .119 ** .064 * .036 .004 -.009 -.028 .064
*
.051 .021 .273 ** .083

**
.381 ** .090 ** .210 ** .120

**
.008 .326 ** .670 ** .484

**
.134 ** .143 ** .118 ** .075

**
.183 ** .131 ** .187 ** .141

**
.107 ** .180 ** .118 ** .079 .088

**
.157 ** .165 ** .136 ** .125

**
.104 ** .143 ** .110 ** .145 .080

**
.554 ** .328 ** .359 ** .341

**
1 .260 ** .341 ** .306 .097

**
.260 ** 1 .336 ** .215 .100

**
.341 ** .336 ** 1 .336 .078

**
.306 ** .215 ** .336 ** 1 .088

**
.097 ** .100 ** .078 ** .088

**
.301 ** .233 ** .319 ** .287

**
.223 ** .236 ** .199 ** .155

**
.206 ** .211 ** .177 ** .155

**
.630 ** .550 ** .617 ** .522 .362

**
-.021 .040 .116

**
.050 .008 .166

**
.000 .044 .161

**
**
.027 -.003 .189

**
**
.024 -.025 .078

**
.058
**
**
**
**
1 .013 .066
*
.066
.047 -.014 .200

**
.050 .025 .225

**
**
-.005 .109
**
.039 .110
**
.012 .326
**
.028 .187
**
.021 .301
**
.000 .233
**
.009 .319
**
-.014 .287
**
.033 1 .064 * .200

**
.237 ** .560
**
.203 ** .195
**
.499 ** .325
**
.409 ** .364
**
.129 ** .173
**
.591 ** .459
**
.162 ** .213
**
.049 .051 .381 ** .008
.036 .021 .090 ** .326 **
.111 ** .273
**
-.013 .083
**
.119 ** .223
**
.064 * .236
**
.036 .199
**
.004 .155
**
-.009 .047 .050 .362 **
1 .534
**
.534 ** 1 .425 ** .284 **
.493 ** .425
**
.081 ** .284
**
.636 ** .690 ** .527 ** Correlatio n ASA Pearson .142 ** .206 ** .237 ** Correlatio **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
.538 ** .193 **
.655 ** .232 **
.446 ** .209 **
.210 ** .670 **
.120 ** .484 **
.206 ** .630 **
.211 ** .550 **
.177 ** .617 **
.155 ** .522 **
.225 ** .560 **
.493 ** .081 **
1 .294 **
.294 ** 1
26
5.4 The post-crisis period summary statistics Average daily returns and median daily returns were noticeably lower in the post-crisis period (Table 5.5) compared to the pre-crisis period. The highest average daily return observed during the post-crisis period for the emerging markets was that of Venezuela (0.18%), while the lowest average return was experienced by China with -0.02%. The highest standard deviation was again Argentina with 1.98%, while the lowest was again Malaysias 0.84%. Indonesia had the highest median return (0.05%) while 11 countries shared medians of 0%. The maximum daily return was Indonesias 17.34% and the minimum experienced was Venezuelas with -12.6%. The correlation figures (Table 5.6) suggest that in the since-crisis period, the relationships within regions were strong, and that the relationships were stronger within regions than across regions. Argentina and Brazil had the strongest correlation of .683 (a large increase from the pre-crisis .281) within Latin America, while Brazil and Venezuela shared the weakest relationship (it was Chile and Venezuela for the total period) in the same region (.011). Korea and Taiwan again had the strongest correlation within Asia (the same for the total period) with .702, while Pakistan and Sri Lanka had the weakest correlation (.002) in the same region (this was India and Sri Lanka during the pre-crisis period). The strongest relationship across the two regions was between Peru and Thailand (this was Chile and Korea for the pre-crisis period) with .372, while the weakest relationship across the regions was once again shared between Venezuela and Sri Lanka as in the pre-crisis period with a correlation of .006. The correlations between the advanced markets (US and Europe) and the emerging markets show that the US had its strongest relationship with Brazil (despite being Mexico for the precrisis period) with a correlation of .738. The US had its weakest relationship yet again with Sri Lanka with a correlation of -0.1. Europes strongest relationship with an emerging market was with Brazil with .638 (and Mexico in the pre-crisis period). Its weakest relationship was with Pakistan with a correlation of .056 (and with Sri Lanka for the pre-crisis period).
27
Table 5.5: Summary statistics for the post-crisis period; Standard Mean ARG BRA CHI COL MEX PER VEN CHN KOR PHI TAI IND INO MAL PAK SRI THA US EUR LAT ASA 0.04% 0.03% 0.02% 0.03% 0.03% 0.01% 0.18% -0.02% 0.02% 0.04% 0.00% 0.04% 0.06% 0.02% 0.02% 0.06% 0.05% 0.01% -0.01% 0.05% 0.03% Deviation Median Minimum Maximum 1.98% 1.97% 1.19% 1.22% 1.46% 1.86% 1.16% 1.94% 1.59% 1.39% 1.45% 1.76% 1.58% 0.84% 1.29% 1.03% 1.43% 1.59% 1.49% 1.13% 0.89% 0.00% 0.00% 0.02% 0.00% 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.05% 0.01% 0.00% 0.00% 0.01% 0.03% 0.02% 0.11% 0.08% -12.15% -11.39% -6.92% -8.68% -7.01% -12.45% -12.60% -8.11% -10.57% -12.27% -6.51% -10.96% -10.38% -9.50% -5.01% -4.98% -10.50% -9.03% -7.62% -6.67% -4.64% 11.00% 14.66% 12.53% 9.19% 11.01% 13.67% 8.20% 9.34% 11.95% 9.82% 6.74% 17.34% 7.92% 4.35% 8.60% 6.46% 7.84% 11.58% 9.87% 7.53% 4.44%
28
Table 5.6: Correlations for post-crisis period

ARG ARG Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson Correlatio n Pearson 1 BRA .683 ** CHI .553 ** COL .511 ** MEX .631 ** PER .550 ** VEN .018 CHN .159 ** KOR .264 ** PHI .196 ** TAI .247 ** IND .324 ** INO .320 ** MAL .242 ** PAK .033 SRI .070 ** THA .339 ** US .633 ** EUR .601 ** LAT .828 ** ASA .363 **
BRA CHI COL MEX PER VEN CHN KOR PHI TAI IND INO MAL PAK SRI THA US EUR LAT ASA
.683 ** .553
**
1 .622
**
.622 ** 1 .473 ** .631 ** .545

**
.479 ** .473
**
.771 ** .631
**
.558 ** .545
**
.011 .072
**
.187 ** .153
**
.294 ** .301
**
.155 ** .213
**
.204 ** .208
**
.351 ** .332
**
.268 ** .303
**
.208 ** .282
**
.024 .045 .070 ** .033 .035 .063 * .089 .128 .081

**
.055 * .121
**
.319 ** .337
**
.738 ** .556
**
.638 ** .609
**
.860 ** .770
**
.348 ** .374
**
.511 ** .631 ** .550

**
.479 ** .771 ** .558

**
1 .453 ** .483
**
.453 ** 1 .536
**
.483 ** .536 ** 1 .045 .182 .318 .233

**
.066 * .014 .045 1 .047 .044 .056

*
.169 ** .143 ** .182

**
.326 ** .297 ** .318

**
.243 ** .131 ** .233

**
.256 ** .184 ** .258

**
.338 ** .345 ** .359

**
.324 ** .253 ** .349

**
.257 ** .206 ** .311

**
.102 ** .059 * .129

**
.326 ** .298 ** .372

**
.398 ** .765 ** .467

**
.568 ** .626 ** .573

**
.677 ** .825 ** .771

**
.397 ** .326 ** .416

**
.018 .159 .264 .196

**
.011 .187 .294 .155

**
.072 ** .153 .301 .213

**
.066 * .169 .326 .243

**
.014 .143 .297 .131

**
.047 1 .353 .243

**
.044 .353
**
.056 * .243 .426

**
.056 * .330 .702 .466

**
.010 .286 .445 .271

**
.055 * .294 .536 .458

**
.049 .309 .527 .474

**
.006 .033 .115 .105

**
.041 .284 .491 .392

**
.000 .071 .225

**
.047 .173 .394 .235

**
.188 ** .211 .370 .244

**
.068 ** .571 .779 .626

**
**
**
**
**
**
**
1 .426
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
1 .466 ** .271 ** .458

**
**
**
**
**
**
**
**
.022 .140 ** .306 ** .154

**
**
**
**
.247 ** .324 ** .320

**
.204 ** .351 ** .268

**
.208 ** .332 ** .303

**
.256 ** .338 ** .324

**
.184 ** .345 ** .253

**
.258 ** .359 ** .349

**
.056 * .010 .055

*
.330 ** .286 ** .294

**
.702 ** .445 ** .536

**
1 .386 ** .535
**
.386 ** 1 .472
**
.535 ** .472 ** 1 .572 ** .111 ** .103

**
.525 ** .403 ** .572

**
.121 ** .108 ** .111

**
.089 ** .109 ** .103

**
.454 ** .485 ** .553

**
.319 ** .459 ** .375

**
.285 ** .419 ** .378

**
.753 ** .671 ** .758

**
.242 ** .033 .070

**
.208 ** .024 .055

*
.282 ** .045 .121

**
.257 ** .070 ** .102

**
.206 ** .033 .059

*
.311 ** .035 .129

**
.049 .063 * .006 .041 .000 .047 .188 ** .068 **
.309 ** .089 ** .033 .284 ** .071 ** .173

**
.527 ** .128 ** .115

**
.474 ** .081 ** .105

**
.525 ** .121 ** .089

**
.403 ** .108 ** .109

**
1 .138 ** .120
**
.138 ** 1 .002 .119 ** .011 .056

*
.120 ** .002 1 .093 ** -.010 .109

**
.488 ** .119 ** .093

**
.111 ** .011 -.010 .250 ** 1 .629

**
.342 ** .056 * .109

**
.312 ** .055 * .107

**
.707 ** .292 ** .240

**
.339 ** .633 ** .601

**
.319 ** .738 ** .638

**
.337 ** .556 ** .609

**
.326 ** .398 ** .568

**
.298 ** .765 ** .626

**
.372 ** .467 ** .573

**
.491 ** .225 ** .394

**
.392 ** .022 .235

**
.454 ** .140 ** .319

**
.485 ** .306 ** .459

**
.553 ** .154 ** .375

**
.488 ** .111 ** .342

**
1 .250 ** .403
**
.403 ** .629 ** 1 .743 ** .471 **
.413 ** .736 ** .743

**
.712 ** .220 ** .471

**
.828 **
.860 **
.770 **
.677 ** .397 **
.825 ** .326 **
.771 ** .416 **
.211 ** .571 **
.370 ** .779 **
.244 ** .626 **
.285 ** .753 **
.419 ** .671 **
.378 ** .758 **
.312 ** .707 **
.055 * .292 **
.107 ** .240 **
.413 ** .712 **
.736 ** .220 **
1 .461 **
.461 ** 1
.363 ** .348 ** .374 ** Correlatio **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
29
5.5 Negative exceedances over the total 11 year period Table 5.7: The negative (co-) exceedances for the total period;
number of negative (co-)exceedances Mean when individually >=6 Mean when >=6 -5.08% -2.68% -4.79% -4.65% -3.70% -3.14% -4.04% -3.60% -4.78% -3.83% -4.72% -4.20% -2.26% -2.09% -3.59% -1.05% -2.80% -0.76% -3.87% -3.18% -3.96% -2.92% >=6 16 32 27 29 25 30 31 7 8 26 34 5 9 14 13 16 9 17 15 7 0 10 22 4 5 18 13 16 13 14 15 6 5 15 30 3 19 21 21 20 16 18 26 6 10 20 59 2 35 25 20 34 28 33 20 26 22 25 134 1 60 34 50 29 52 32 37 93 99 47 533 0 2056 2056 2056 2056 2056 2056 2056 2056 2056 2056 2056
China Korea Philipinnes Taiwan India Indonesia Malaysia Pakistan Sri Lanka Thailand Total
Argentina Brazil Chile Colombia Mexico Peru Venezuela Total
-6.80% -6.02% -3.76% -3.65% -4.65% -5.73% -2.75% -4.77%
-6.80% -6.02% -3.76% -3.65% -4.46% -5.39% -0.18% -4.32%
15 15 15 15 14 14 3 15
15 14 16 11 16 15 3 18
19 23 13 13 22 18 4 28
23 20 21 13 24 15 4 40
18 31 30 25 30 23 19 88
54 41 49 67 38 58 109 416
2262 2262 2262 2262 2262 2262 2262 2262
Table 5.7 above can be interpreted as follows; for example in Asia, there were 134 days when only 2 countries experienced same day negative exceedances (negative return shocks) in the 11 year period. There were 16 days when China shared negative exceedances with 6 or more countries in Asia. When interpreting returns, Thailand had a mean return of -3.18% on the days when 6 or more countries in Asia were experiencing a negative exceedance at the same time. The same country had a mean return of -3.87% during the days when Thailand was specifically one of the 6 or more countries experiencing exceedances on the same day (no single Asian country participated in all of the 34 days when 6 or more Asian countries shared negative exceedances). The Total returns were simply the average of the returns in each column. 5.5.1 Asia: For the total 11 year period there were 812 days when extreme negative returns occurred within the Asian countries (2868 observations, 2056 days where no shocks occurred) South Korea was shown to be the most susceptible to extreme negative contagion in Asia as it shared 32 out of the total of 34 days where 6 or more Asian countries experienced negative shocks simultaneously. Koreas high susceptibility to extreme contagion was only slightly higher than that of Malaysia (31 days), Indonesia (30 days) and Taiwan (29 days). In contrast
30
to this, Pakistan only endured 7 days of negative return shocks out of the potential 34 days in which 6 or more countries suffered extreme negative shocks. Sri Lanka also showed similar signs of immunity with only 8 days shared in the same category. Apart from Pakistan and Sri Lanka, China also showed signs of independence by only participating in 16 out of the 34 days.
The average return for all Asian countries during these 34 days was -2.92%. South Korea had the lowest average return (-4.65%) in Asia during the 34 days when 6 or more countries shared negative shocks. This was contrasted by Sri Lanka (-0.76%) with the highest return during that period. This is perhaps unsurprising since Sri Lanka was largely absent from the 34 days of shared contagion (by 6 or more countries). It is therefore more illustrative to consider Sri Lankas average return for the 8 days that it did in fact share with 6 or more countries (-2.80%). From the countries that shared in the majority of the 34 days (i.e. excluding Pakistan and Sri Lanka), Malaysia shows the least negative average return during all 34 days of shared contagion (-2.09%) and also the least negative average return when it participated in the 34 days (-2.26%). This second figure is even lower than those of Pakistan (3.59%) and Sri Lanka (-2.80%) which avoided extreme negative contagion for the most part.
5.5.2 Latin America There was a total of 606 days in which extreme negative returns were experienced by every country (2868 observations; 2262 where no shocks occurred). Latin America suffered fewer days of extreme contagion than Asia. For the 15 days where 6 or more countries experience extreme negative returns simultaneously, 4 countries participated in each of the 15 days (Argentina, Brazil, Chile and Colombia). A further 2 countries (Mexico and Peru) shared in 14 of these 15 days. Venezuela was largely immune to the extreme contagion with only 3 days shared amongst the 15, however Venezuela claimed the highest number of days in which negative shocks were shared with just one other country (109 days). Second to Venezuela in this category was Colombia with a comparatively low 67 days. This level of contagion sharply declined for Venezuela as the number of shared days of negative shocks increased across Latin America.
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Argentina had the lowest average return (-6.8%) during the 15 days of contagion with Brazil (-6.02%) and Peru (-5.39%) just above. Unsurprisingly, Venezuela had the least negative average return within this category (-0.18%). In the same period, the average return for all the Latin American countries was -4.32%. The countries below this, other than Venezuela, were Chile (-3.76%) and Colombia (-3.65%).
5.6 Positive exceedances over the total 11 year period See table 5.8. Table 5.8: The positive (co-) exceedances for the total period;
number of positive (co-)exceedances 0 1988 1988 1988 1988 1988 1988 1988 1988 1988 1988 1988 1 80 28 65 35 41 42 53 80 101 47 572 2 34 38 33 39 46 32 32 41 21 42 179 3 11 30 17 27 24 27 22 12 12 19 68 4 10 33 10 20 12 16 16 6 3 15 32 5 6 8 8 4 6 9 4 1 3 6 11 >=6 Mean when >=6 Mean when individually >=6 6 1.91% 3.89% 14 3.89% 4.52% 10 2.66% 4.22% 17 3.48% 3.74% 13 3.98% 4.88% 16 4.59% 5.04% 16 2.21% 2.36% 3 0.86% 3.59% 4 0.79% 2.49% 16 4.11% 4.38% 18 2.85% 3.91%
2193 2193 2193 2193 2193 2193 2193 2193
72 55 54 76 51 71 104 483
29 33 34 35 29 32 30 111
12 26 23 16 29 14 9 43
11 13 14 2 15 9 0 16
14 12 13 10 14 12 0 15
6 6 6 5 6 6 1 6
4.97% 4.82% 3.46% 3.11% 4.30% 4.57% 0.56% 3.68%
4.97% 4.82% 3.46% 3.44% 4.30% 4.57% 2.34% 3.99%
5.6.1 Asia There were fewer days where extreme positive returns were shared in Asia in comparison to the amount of days where extreme negatives were shared (18 days in total compared to 34 days for negative). Taiwan had the highest level of positive contagion by participating in 17
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of the 18 days where 6 or more countries simultaneously experienced extreme positive returns. Taiwan was closely followed by Indonesia, Malaysia and Thailand which all shared 16 days within the total of 18. Pakistan and Sri Lanka again showed signs of immunity with only 3 and 4 days shared respectively within the 18. Similarly, China again showed a lack of susceptibility to positive contagion with only 6 days shared in the same category.
The average return for all the Asian countries within the >6 category was 2.85%. This was surpassed by Indonesia (4.59%) with the largest return in the region. Thailand followed behind with an average return of 4.11%. Pakistan (0.86%), Sri Lanka (0.79%) and China (1.91%) had the lowest average returns in this category. 5.6.2 Latin America Similarly to the extreme negative returns, Latin America had less extreme positive returns than Asia (675 days out of the 2868 observations, 2193 days with no extremes). There was a total of 6 days in which 6 or more countries shared extreme positive returns. The countries that participated in each of these 6 days were Argentina, Brazil, Chile, Mexico and Peru. Venezuela again avoided contagion for the most part by only experiencing 1 day of extreme positives in this category. 3.68% was the average return across all countries when 6 or more countries shared extreme positive returns. Argentina experienced the highest average return in the >6 category with 4.97%. This was closely followed by Brazil with 4.82%. Unsurprisingly Venezuela had the lowest average return of 0.56%. Colombia had the second lowest with 3.11%.
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5.7 Negative exceedances during the pre-crisis period Table 5.9: The negative (co-) exceedances for the pre-crisis period;
-8.37% -5.46% -2.20% -4.59% -3.58% n/a -1.77% -4.33%
-8.37% -5.46% -2.20% -4.59% -3.58% -0.57% -1.77% -4.33%
1 1 1 1 1 0 1 1
4 3 4 3 4 1 1 4
4 5 1 2 4 2 2 5
6 6 3 7 6 0 2 10
9 14 13 14 13 8 15 43
41 31 25 46 21 20 68 252
1107 1107 1107 1107 1107 1107 1107 1107
5.7.1 Asia In the pre-crisis period (1422 days), there were 1017 days where no extreme returns occurred in Asia. There were only 6 days when 6 or more countries had extreme negative returns simultaneously. Indonesia shared in all of 6 of these days while China and Sri Lanka only shared 1 day each in this category. Although Pakistan and Sri Lanka had few days experienced in the greater than or equal to 6 category (2 and 1 respectively), they had the 2 highest amount of days in which extreme negative returns were shared exclusively between 2 countries in Asia (59 and 65 days respectively). The average return for Asian countries for the 6 days in which 6 or more shared extreme returns was -2.90%. Indonesia had the lowest average return in this category with a -4.73% return. Contrastingly, Sri Lanka had the least negative average return with -0.75%. Despite having only 1 day the 6 or more category, China had the most extreme negative return of 13.17%.
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5.7.2 Latin America Latin America experienced less contagion in this period than Asia with 1107 days where no extreme returns happened anywhere. There was only 1 day in which 6 or more countries shared extreme negative returns simultaneously. Every country except Peru participated in this category. Venezuela had the highest number of days with an extreme negative return shared exclusively with one other country in the region (68 days). The average return for all of the countries on the day with 6 or more shared negative exceedances was -4.33%. The least negative return was of course Peru (0.57%) as it avoided a return shock on this day. The most negative return was that of Argentina with -8.37%. This was followed by Brazils return of -5.46%.
5.8 Positive exceedances during the pre-crisis period Table 5.10: The positive (co-) exceedances for the pre-crisis period;
number of positive (co-)exceedances 0 965 965 965 965 965 965 965 965 965 965 965 1 33 18 29 15 19 27 30 53 60 24 308 2 12 22 21 27 18 20 22 23 12 27 102 3 3 16 8 14 5 12 10 7 6 9 30 4 2 7 4 5 3 6 4 1 2 6 10 5 2 3 4 1 2 2 0 1 2 3 4 >=6 Mean when >=6 Mean when individually >=6 0 0.85% n/a 3 4.16% 4.16% 1 1.66% 3.60% 3 3.34% 3.34% 2 2.60% 3.10% 3 4.15% 4.15% 2 1.15% 1.33% 1 2.01% 4.68% 0 0.79% n/a 3 3.64% 3.64% 3 2.43% 3.50%
1061 1061 1061 1061 1061 1061 1061 1061
54 35 28 49 31 29 48 274
17 18 14 23 15 13 26 63
5 13 9 10 12 4 7 20
2 2 1 0 2 1 0 2
2 1 2 2 2 1 0 2
0 0 0 0 0 0 0 0
n/a n/a n/a n/a n/a n/a n/a n/a
n/a n/a n/a n/a n/a n/a n/a n/a
5.8.1 Asia There were 965 days where no positive exceedances occurred in Asia and a total of only 3 days where 6 or more countries had positive exceedances simultaneously. China and Sri Lanka did not participate in these days, whereas South Korea, Taiwan, Indonesia and
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Thailand were involved in all 3 days. Pakistan and Sri Lanka had the highest number of days where positive exceedances were shared exclusively with 1 other country (53 and 60 days respectively). The average return for the Asian countries during the 3 days of extreme positive contagion (6 or more shared exceedances) was 2.43%. The highest were South Korea (4.16%) and Indonesia (4.15%) while the lowest were China and Sri Lanka which avoided participating in any of the 3 days with average returns of 0.85% and 0.79%
5.8.2 Latin America There were no observed instances of extreme positive contagion in Latin America in the precrisis period. There were only 4 days in which 4 or more countries shared positive exceedances. In total there were 361 days where positive exceedances occurred (1061 days where no exceedances occurred anywhere out of the 1422 days observed in the pre-crisis period). No average return figures during periods of extreme contagion are available due to the fact that no extreme contagion occurred.
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5.9 Negative exceedances during the post-crisis period Table 5.11: The negative (co-) exceedances for the post-crisis period;
-6.69% -6.06% -3.87% -3.58% -4.73% -5.73% -1.49% -4.59%
-6.69% -6.02% -3.87% -3.58% -4.52% -5.73% -0.06% -4.35%
14 14 14 14 13 14 2 14
11 11 12 8 12 14 2 14
15 18 12 11 18 16 2 23
17 14 18 6 18 15 2 30
9 17 17 11 17 15 4 45
13 10 24 21 17 38 41 164
1155 1155 1155 1155 1155 1155 1155 1155
5.9.1 Asia There were 1039 days where there were no negative exceedances whatsoever (1446 days observed in post-crisis period). In contrast to the pre-crisis period, there were 28 days in the post crisis period in which negative exceedances were shared between 6 or more countries at the same time. Malaysia participated more than any other Asian country in this category (27 days), while Pakistan and Sri Lanka (5 and 7 days respectively) participated the least. The average return across Asia during the most contagious days was -2.92%. The most negative average return was South Koreas with -4.70% while Pakistan (-0.86%) and Sri Lanka (-0.76%) were the least affected countries.
5.9.2 Latin America There were 1155 days in which no negative exceedances occurred in Latin America in the post-crisis period. There was a large increase of extreme contagion in this period compared to the pre-crisis period with a total of 14 days of 6 or more countries experiencing exceedances
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simultaneously. Argentina, Brazil, Chile, Colombia and Peru participated in each of the 14 days of extreme contagion, while Venezuela only participated for 2 days during this 14 day period. The average return across Latin America during the 14 days of extreme contagion was 4.35%. The lowest average return was suffered by Argentina (-6.69%) and the next lowest was that of Brazil (-6.02%). The least extreme was average return was that of Venezuela (0.06%).
5.10 Positive exceedances during the post-crisis period Table 5.12: The positive (co-) exceedances for the since-crisis period;
number of positive (co-)exceedances 0 1023 1023 1023 1023 1023 1023 1023 1023 1023 1023 1023 1 47 10 36 20 22 15 23 27 41 23 264 2 22 16 12 12 28 12 10 18 9 15 77 3 8 17 9 13 19 15 12 5 6 10 38 4 8 13 6 15 9 10 12 5 1 9 22 5 4 5 4 3 4 7 4 0 1 3 7 >=6 Mean when >=6 Mean when individually >=6 6 2.12% 5.02% 11 3.83% 4.62% 9 2.86% 4.29% 14 3.51% 3.91% 11 4.26% 5.27% 13 4.67% 5.21% 14 2.42% 2.51% 2 0.63% 3.05% 4 0.79% 2.49% 13 4.21% 4.55% 15 2.93% 4.09%
1132 1132 1132 1132 1132 1132 1132 1132
18 12 26 27 20 42 56 209
12 15 20 12 14 19 4 48
7 13 14 6 17 10 2 23
9 11 13 2 13 8 0 14
12 11 11 8 12 11 0 13
6 6 6 5 6 6 1 6
4.97% 4.82% 3.46% 3.11% 4.30% 4.57% 0.56% 3.68%
4.97% 4.82% 3.46% 3.44% 4.30% 4.57% 2.34% 3.99%
5.10.1 Asia Extreme contagion also increased massively for positive exceedances in the since-crisis era with 15 days in total in which 6 or more countries simultaneously experienced positive exceedances. Indonesia and Thailand participated the most in this category with 13 days
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each. China, Pakistan and Sri Lanka were the least affected countries with 6, 2 and 4 days respectively involved in these 15 days. The average return across Asia during these 15 days was 2.93%. The countries that were below this average were China (2.12%), Philippines (2.86%), Malaysia (2.42%), Pakistan (0.63%) and Sri Lanka (0.79%). Indonesia had the highest average return of 4.67%. China experienced the highest average return over the 6 days in which it participated in the extreme contagion with 5.02%.
5.10.2 Latin America There were 1132 days in which no negative exceedances occurred in Latin America in the since-crisis period. There was also a large increase of extreme contagion in this period compared to the pre-crisis period with a total of 6 days of 6 or more countries experiencing exceedances simultaneously. All of the Latin American countries participated in at least 5 of the days of extreme positive contagion with the exemption being Venezuela which only participated in 1 of these days. The average return across Latin America during the 6 days of extreme positive contagion was 3.68%. The highest average return was experienced by Argentina (4.97%) and the lowest was that of Venezuela (2.34%).
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5.11 Regression results In attempting to further determine the characteristics of contagion a binary logistic regression model was used. The regression model was similar to that used by Boyson (2006) in which explanatory variables in the model were representative of broad market indicators which may help to characterize contagion. These explanatory variables were changes in interest rates, changes in the US Dollar exchange rate against a basket of other major currencies, and changes in market volatility over the same time period. Extreme positive and negative returns were analysed separately. Furthermore the regression analysis was implemented for each of the different time periods of pre-crisis, since-crisis and the total 11 year period. The response variable used was representative of the total number of same day exceedances across each of the 2 regions (Asia and Latin America). This enabled the logit model to measure the relationship between the broad market indicators and extreme returns across an entire region rather than within the individual countries analysed.
40
5.11.1 Asian Negative exceedances; Total period regression output (Table1)
Negative exceedances in Asia was the first response variable used. The Hosmer-Lemeshow test indicated that the model was a good predictor of contagion. The likelihood of an extreme negative return in Asia was increased slightly with an increase in market volatility. Contrastingly, increases in the Dollar and Treasury Bills slightly reduced the probability of an extreme negative return in Asia. Both market Volatility and Treasury Bills had a significant relationship with negative exceedances in Asia as indicted by the low p-values. The Dollar however did not have a significant relationship.
Table 1: Asian Negative exceedances; Total period regression output
Hosmer and Lemeshow Test Step 1 Chi-square 10.957 df 8 Sig. .204
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.001 -.004 .047 -.992 S.E. .004 .001 Wald .067 16.185 df 1 1 1 1 Sig. .795 .000 .000 .010 Exp(B) .999 .996 1.048 .371
.004 114.154 .383 6.706
a. Variable(s) entered on step 1: Dollar, TBill, VIX.
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5.11.2 Asian Positive exceedances: Total period regression output (Table2)
The Hosmer-Lemeshow test indicated that the variables in the model were not strong predictors of extreme positive returns in Asia. An increase in either the dollar or market volatility only slightly increased the likelihood of an extreme positive return in Asia. An increase in Treasury Bills slightly decreased the likelihood of a positive exceedance in the region. All of the market indicator variables had a significant relationship with the positive exceedances in Asia as demonstrated by the low p-values.
Table 2: Asian Positive exceedances: Total period regression output Hosmer and Lemeshow Test Step 1 Chi-square 26.661 df 8 Sig. .001
Variables in the Equation B Dollar Step 1a TBill VIX Constant .010 -.004 .027 -1.508 S.E. .004 .001 .004 .384 Wald 8.066 13.971 42.346 15.452 df 1 1 1 1 Sig. .005 .000 .000 .000 Exp(B) 1.010 .996 1.027 .221
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5.10.3 Latin American Negative exceedances Total period regression output (Table3)
Similar to the above, the Hosmer-Lemeshow test indicated that the variables in the model were not strong predictors of extreme negative returns in Latin America. An increase in either the Dollar or market volatility had a small increase in the probability of Latin America experiencing a same day negative exceedance. Contrastingly, an increase in Treasury Bills slightly reduced the likelihood of an extreme negative return in the region. The p-values indicated that Treasury Bills and market volatility had a significant relationship with the response variable while the Dollar did not.
Table 3: Latin American Negative exccedances Total period regression output Hosmer and Lemeshow Test Step 1 Chi-square 15.999 df 8 Sig. .042
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5.10.4 Latin American Positive exceedances: Total period regression output (Table4)
The Hosmer-Lemeshow test indicated that the variables in the model were not strong predictors of extreme positive returns in Latin America. An increase in either the Dollar or market volatility increased the likelihood of a positive exceedance occurring in Latin America. An increase in Treasury Bills decreased the likelihood of same occurring. The Dollar did not have a significant relationship with the response variable whilst market volatility and Treasury Bills did as shown by the p-values.
Table 4:Latin American Positive exceedances, total period regression output Hosmer and Lemeshow Test Step 1 Chi-square 19.441 df 8 Sig. .013
Variables in the Equation B Dollar Step 1a TBill VIX Constant .002 -.002 .022 -1.410 S.E. .004 .001 .004 .408 Wald .392 3.867 24.864 11.936 df 1 1 1 1 Sig. .531 .049 .000 .001 Exp(B) 1.002 .998 1.022 .244
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5.10.5 Asian Negative exceedances Pre-crisis period regression output (Table5)
The Hosmer-Lemeshow test indicated that the variables in the model were not strong predictors of extreme positive returns in Latin America. The output indicated that Treasury Bills had close to no effect on Asian Negative exceedances in the pre-crisis data. There was no significant relationship between these variables. An increase in the Dollar decreased the likelihood of an Asian negative exceedance while contrastingly an increase in market volatility increased the likelihood of a negative exceedance in Asia. Unlike Treasury Bills, the p-values indicated that both the Dollar and market volatility had a significant relationship with the response variable. Table 5: Asian Negative exceedances Pre-crisis regression output Hosmer and Lemeshow Test Step 1 Chi-square 17.686 df 8 Sig. .024
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.013 .000 .056 -.648 S.E. .007 .002 .010 .621 Wald 3.864 .027 29.858 1.088 df 1 1 1 1 Sig. .049 .870 .000 .297 Exp(B) .987 1.000 1.058 .523
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5.10.6 Asian Positive exceedances Pre-crisis period regression output (Table6)
The Hosmer-Lemeshow test indicated that this model was a good predictor of extreme positive returns in Asia during the pre-crisis period. The Dollar was the only explanatory variable in this model to have a significant relationship with the dependent variable and an increase in the Dollar slightly increased the likelihood of an extreme positive return in the region.
Table 6: Asian Positive exceedances Pre-crisis regression output Hosmer and Lemeshow Test Step 1 Chi-square 12.012 df 8 Sig. .151
Variables in the Equation B Dollar Step 1a TBill VIX Constant .029 .000 -.015 -3.138 S.E. .007 .002 .011 .733 Wald 16.360 .049 2.094 18.342 df 1 1 1 1 Sig. .000 .825 .148 .000 Exp(B) 1.030 1.000 .985 .043
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5.10.7 Latin American Negative exceedances Pre-crisis period regression output (Table7)
The Hosmer-Lemeshow test indicated that the model was a poor predictor of extreme negative returns in Latin America before the onset of the global financial crisis as the p-value was not greater than .05. This was further highlighted by the low p-values which indicated that none of the explanatory variables had a significant relationship with the regions negative exceedances. Table 7: Latin American Negative exceedances Pre-crisis period regression output Hosmer and Lemeshow Test Step 1 Chi-square 18.716 df 8 Sig. .016
Variables in the Equation B Dollar Step 1a TBill VIX Constant .010 -.003 .010 -1.879 S.E. .007 .002 .011 .701 Wald 2.091 2.374 .807 7.180 df 1 1 1 1 Sig. .148 .123 .369 .007 Exp(B) 1.010 .997 1.010 .153
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5.10.8 Latin American Positive exceedances Pre-crisis period regression output (Table8)
The Hosmer-Lemeshow test indicated that this model was a poor predictor of extreme positive returns in Latin America during the pre-crisis period. Market volatility was the only explanatory variable with a significant relationship with positive exceedances in the region during this period. An increase in market volatility increased the likelihood of a positive exceedance occurring. Table 8: Latin American Positive exceedances Pre-crisis period regression output Hosmer and Lemeshow Test Step 1 Chi-square 20.825 df 8 Sig. .008
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.006 .001 .027 -1.053 S.E. .007 .002 .011 .650 Wald .861 .070 6.378 2.626 df 1 1 1 1 Sig. .353 .792 .012 .105 Exp(B) .994 1.001 1.027 .349
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5.10.9 Asian Negative exceedances Post-crisis period regression output (Table9)
The Hosmer-Lemeshow test indicated that the model had weak predictive capabilities as highlighted by the tests p-value. All the broad market indicator variables however had significant relationships with negative exceedances in Asia in the since-crisis period. Increases in both the Dollar and Treasury Bills decreased the likelihood of a negative exceedance occurring in the region. Contrastingly, increases in market volatility increased the likelihood of a negative exceedance in the region during this period. Table 9: Asian Negative exceedances Post-crisis period regression output Hosmer and Lemeshow Test Step 1 Chi-square 28.220 df 8 Sig. .000
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.037 -.005 .063 1.463 S.E. .012 .002 Wald 10.182 11.012 df 1 1 1 1 Sig. .001 .001 .000 .098 Exp(B) .964 .995 1.065 4.320
.006 106.840 .884 2.742
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5.10.10 Asian Positive exceedances Post-crisis period regression output (Table10)
The Hosmer-Lemeshow test indicates that the model had weak predictive capabilities as highlighted by the p-value. Each of the broad market indicator variables had significant relationships with positive exceedances in Asia in the since-crisis period. Increases in both the Dollar and Treasury Bills decreased the likelihood of a positive exceedance occurring while an increase in market volatility increased the likelihood of a positive exceedance occurring in Asia during this period.
Table 10: Asian Positive exceedances Post-crisis period regression ouput Hosmer and Lemeshow Test Step 1 Chi-square 41.834 df 8 Sig. .000
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.025 -.004 .046 .765 S.E. .010 .001 .006 .784 Wald 5.573 8.423 67.169 .951 df 1 1 1 1 Sig. .018 .004 .000 .330 Exp(B) .976 .996 1.048 2.148
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5.10.11 Latin American Negative exceedances Post-crisis period regression output (Table11)
The Hosmer-Lemeshow test indicated that the model had good predictive capabilities as highlighted by the p-value. Both the Dollar and market volatility had significant relationships with negative exceedances in the since-crisis period while Treasury Bills did not. Increases in the Dollar decreased the likelihood of negative exceedances while contrastingly increases in market volatility increased the likelihood of negative exceedances in Latin America in the since-crisis period.
Table 11: Latin American Negative exceedances Post-crisis period regression output Hosmer and Lemeshow Test Step 1 Chi-square 11.950 df 8 Sig. .153
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5.10.12 Latin American Positive exceedances Post-crisis period regression output (Table12)
Similar to the above, the Hosmer-Lemeshow test indicated that the model had good predictive capabilities as highlighted by the p-value. Both the Dollar and market volatility had a significant relationship with positive exceedances while Treasury Bills had no significant relationship with the dependent variable. An Increase in the Dollar decreased the likelihood of a positive exceedance while contrastingly an increase in market volatility increased the likelihood of positive exceedance in Latin America during the since-crisis period.
Table 12: Latin American Positive exceedances Post-crisis period regression output Hosmer and Lemeshow Test Step 1 Chi-square 11.009 df 8 Sig. .201
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.038 -.002 .037 1.136 S.E. .011 .002 .006 .853 Wald 10.921 1.280 41.619 1.772 df 1 1 1 1 Sig. .001 .258 .000 .183 Exp(B) .963 .998 1.038 3.114
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6. Discussion The summary statistics illustrate that there was an enormous increase in the correlations both within regions and across regions after the onset of the global financial crisis. In many cases the correlations more than doubled. To further examine contagion it was therefore necessary to measure the occurrence of exceedances rather than rely solely on correlation coefficients. In order to do this, the same methodology as that of Bae et al. (2003) was utilised to illustrate the extent of contagion that was not evident in correlations. By isolating returns that are restricted to the bottom and top 5% of the marginal distribution of returns (exceedances), correlation coefficients were no longer relied upon and extreme events were measured and illustrated as shown in the preceding sections.
From the exceedance tables it is clear that contagion of both extreme positive and negative returns also largely increased after the onset of the global financial crisis. For the total 11 year period, negative contagion was much more prevalent than positive contagion. Negative contagion occurred more than twice as much within Asia than within Latin America. In the pre-crisis period, contagion was less frequent than in the post crisis period. The symmetry observed by Bae et al (2003, 725) between extreme positive and negative contagion in both regions (Asia and Latin America) is no longer evident in this updated analysis. Negative shocks were observed more frequently than positive shocks. Pakistan, Sri Lanka and Venezuela appeared to demonstrate exceedance traits that are unique to their respective regions (i.e. participating in few of the days when 6 or more countries in a region experienced exceedances simultaneously). These markets therefore may prove interesting subjects for further research in the field.
In order to greater determine the characteristics of financial contagion; a binary logistic regression model was employed. The total number of exceedances that had occurred across each region were calculated and used as the dependent variable to analyse the determinants of contagion in each region across each of the time periods. Broad market indicators were used as the explanatory variables. These explanatory variables were interest rates, US dollar exchange rates against a basket of major currencies, and market volatility.
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The model output indicated that there was either a weak or nonexistent relationship between the broad market indicators and exceedances in all of the different time periods for both Asia and Latin America. This perhaps suggests that the occurrence of contagion is a unique phenomenon that is distinct from variables typically reflective of market performance. A further analysis into the causes of contagion is therefore necessary in order to help understand contagion between equity markets. The analysis carried out and the results illustrated above help by clearly illustrating both the occurrence and characteristics of contagion across emerging equity markets both in Asia and Latin America.
The data used covers an extensive 11 year period which is a lengthier time-series than that used in most previous research. The framework used also includes the different time periods of before and after the onset of the global financial crisis. This has illustrated the characteristics of contagion in a period of relative market stability (the pre-crisis period), a period of market turbulence (after the onset of the global financial crisis), and thusly the changes in these characteristics over these differing periods. This thesis has highlighted the exceedance characteristics of Asia and Latin America, as well as draw attention to the unique country-specific exceedance traits of Pakistan, Sri Lanka and Venezuela.
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7. Conclusion The results from this work show that there was an enormous increase in the correlations within and across regions, as well as a large increase in the number of shared exceedances, after the onset of the global financial crisis. Contagion was evidently more widespread in Asia than in Latin America. The results from the logit model also suggest that contagion is not easily explained or predicted using broad market indicators as explanatory variables and is perhaps a separate phenomenon to broad market performance. The summary statistics provide a preliminary outline of the relationships between the markets. The exceedance calculations provide an additional set of information that is largely independent from an analysis on correlation coefficients. The exceedances illustrate in detail the extent of contagion as well as highlight any unusual occurrences. For example, the unique exceedance characteristics of Sri Lanka, Pakistan, and Venezuela have been identified and this raises questions for the potential diversification benefits of these markets from the perspective of international investors. The extent of contagion across Asia and Latin America has been clearly outlined in this work and the individual characteristics of each countrys return shocks have been meticulously isolated providing a comprehensive illustration of contagion in these regions and potential grounds for further research especially in the determining of the causes of contagion.
55
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Journal, 119(534), 158-171. Goldstein, I., & Pauzner, A. (2004). Contagion of self-fulfilling financial crises due to diversification of investment portfolios. Journal of Economic Theory,119(1), 151-183. Iwatsubo, K., & Inagaki, K. (2007). Measuring financial market contagion using dually-traded stocks of Asian firms. Journal of Asian Economics, 18(1), 217-236. Karolyi, G. A. (2003). Does international financial contagion really
exist?.International Finance, 6(2), 179-199.
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Rigobon, R. (2002). Contagion: how to measure it?. In Preventing currency crises in emerging markets (pp. 269-334). University of Chicago Press. Bae, K. H., Karolyi, G. A., & Stulz, R. M. (2003). A new approach to measuring financial contagion. Review of Financial studies, 16(3), 717-763.
57
Appendix 1: Binary logistic regression output Asian Negative exceedances Total period regression output (Table1)
Omnibus Tests of Model Coefficients Chi-square Step Step 1 Block Model 124.840 124.840 124.840 df 3 3 3 Sig. .000 .000 .000
Model Summary Step -2 Log likelihood 1 3293.126a Cox & Snell R Square .043 Nagelkerke R Square .061
Hosmer and Lemeshow Test Step 1 Chi-square 10.957 Df 8 Sig. .204
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.001 -.004 .047 -.992 S.E. .004 .001 Wald .067 16.185 df 1 1 1 1 Sig. .795 .000 .000 .010 Exp(B) .999 .996 1.048 .371
.004 114.154 .383 6.706
58
Asian Positive exceedances Total period regression output (Table2)
59
Latin American Negative exceedances Total period regression output (Table3)
60
Latin American Positive exceedances Total period regression output (Table4)
Variables in the Equation B Dollar Step 1a TBill VIX Constant .002 -.002 .022 -1.410 S.E. .004 .001 .004 .408 Wald .392 3.867 24.864 11.936 df 1 1 1 1 Sig. .531 .049 .000 .001 Exp(B) 1.002 .998 1.022 .244
61
Asian Negative exceedances Pre-crisis period regression output (Table5)
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.013 .000 .056 -.648 S.E. .007 .002 .010 .621 Wald 3.864 .027 29.858 1.088 df 1 1 1 1 Sig. .049 .870 .000 .297 Exp(B) .987 1.000 1.058 .523
62
Asian Positive exceedances Pre-crisis period regression output (Table 6)
Variables in the Equation B Dollar Step 1a TBill VIX Constant .029 .000 -.015 -3.138 S.E. .007 .002 .011 .733 Wald 16.360 .049 2.094 18.342 df 1 1 1 1 Sig. .000 .825 .148 .000 Exp(B) 1.030 1.000 .985 .043
63
Latin American Negative exceedances Pre-crisis period regression output (Table7)
Variables in the Equation B Dollar Step 1a TBill VIX Constant .010 -.003 .010 -1.879 S.E. .007 .002 .011 .701 Wald 2.091 2.374 .807 7.180 df 1 1 1 1 Sig. .148 .123 .369 .007 Exp(B) 1.010 .997 1.010 .153
64
Latin American Positive exceedances Pre-crisis period regression output (Table8)
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.006 .001 .027 -1.053 S.E. .007 .002 .011 .650 Wald .861 .070 6.378 2.626 df 1 1 1 1 Sig. .353 .792 .012 .105 Exp(B) .994 1.001 1.027 .349
65
Asian Negative exceedances Post-crisis period regression output (Table9)
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.037 -.005 .063 1.463 S.E. .012 .002 Wald 10.182 11.012 df 1 1 1 1 Sig. .001 .001 .000 .098 Exp(B) .964 .995 1.065 4.320
.006 106.840 .884 2.742
66
Asian Positive exceedances Post-crisis period regression output (Table10)
67
Latin American Negative exceedances Post-crisis period regression output (Table11)
68
Latin American Positive exceedances Post-crisis period regression output (Table12)
Variables in the Equation B Dollar Step 1a TBill VIX Constant -.038 -.002 .037 1.136 S.E. .011 .002 .006 .853 Wald 10.921 1.280 41.619 1.772 df 1 1 1 1 Sig. .001 .258 .000 .183 Exp(B) .963 .998 1.038 3.114
69
Each of the below data (Appendix 2-5) were downloaded from the Bloomberg interface and ranged from 2nd January 2002 to 28th December 2012
Appendix 2: Asian equity markets
China The CSI 300 Index is an index that is comprised of 300 stocks listed on the Shanghai and Shenzhen Stock Exchanges. Korea The KOSPI Index is comprised of all common stocks on the Korean Stock Exchanges (largest capitalisation stocks). Philippines The PSEi Index is comprised of stocks representative of the Industrial, Properties, Services, Holding Firms, Financial and Mining & Oil Sectors of the PSE (Philippine Stock Exchange). The index is weighted towards large capitalisation companies. Taiwan The TWSE is comprised of all listed common stocks traded on the Taiwan Stock Exchange. The index is weighted towards large capitalisation companies. India The S&P BSE Sensex Index is comprised of large cap companies that have been selected based on liquidity and industry representation. Indonesia The Jakarta Stock Price Index is an index of all the stocks listed on the Indonesia Stock Exchange.
70
Malaysia The FTSE Bursa Malaysia KLCI Index comprises the largest 30 companies by market capitalisation on Bursa Malaysia's Main Board. Pakistan The Karachi Stock Exchange KSE100 Index comprises the largest companies by market capitalisation from 34 different sectors on the KSE. The remaining companies are chosen based on market cap to provide an index of 100 companies.
Sri Lanka Sri Lanka Stock Market Colombo All-Share Index (CSEALL) is an index of all the companies listed on the Colombo Stock Exchange. It covers all publicly traded companies in Sri Lanka.
Thailand The Bangkok SET Index is an index of the largest cap stocks traded on the Stock Exchange of Thailand.
71
Appendix 3: Latin American equity markets
Argentina The Argentina Merval Index is an index of publicly traded companies on the Buenos Aires Stock Exchange.
Brazil The Ibovespa Index is a index which is weighted by the volume traded and is comprised of the most liquid stocks that are traded on the Sao Paulo Stock Exchange.
Chile The IPSA Index is an Index that is comprised of the 40 stocks with the most liquid stocks (based on the trading volume) on the Santiago Stock Exchange (Bolsa de Comercio de Santiago).
Colombia The IGBC Index from the Colombia Stock Exchange is an index of the most liquid stocks that are traded on the Colombian Stock Exchange (Bolsa de Valores de Colombia).
Mexico The Mexican IPC index (Indice de Precios y Cotizaciones) is an index of the largest companies by market capitalisation traded on the Mexican Stock Exchange.
72
Peru The IGBVL Index illustrates the performance of the largest and most actively traded stocks on the Lima Exchange.
Venezuela The IBC Index from the Caracas Stock Exchange (Venezuela) comprises the 15 most liquid (largest by market capitalisation) stocks in Venezuela traded on the Caracas Stock Exchange (Bolsa de Valores de Caracas).
73
Appendix 4: US and European equity markets
US The S&P 500 is reflective of large cap U.S. companies. The index includes 500 leading companies and comprises around 80% of the available US market capitalization. Europe The STOXX Europe 600 Index is representative of companies with varying capitalisation (large, mid, and small cap) across 18 European countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
74
Appendix 5: Broad market indicators

Dollars International Value (i.e. variable for exchange rates) USDX This U.S. Dollar Index indicates the international value of the USD. The USDX does this by taking the average of the exchange rates between the USD and other major world currencies. The exchange rates used to compute the value of the index are supplied by approximately 500 banks.
US 3 month Treasury Bills (i.e. variable for interest rates) S&P/BGC 0-3M US TBill Index The S&P/BGCantor 0-3 Month U.S. Treasury Bill Index is an index of U.S. Treasury Bills prices and comprises Bills with maturities ranging from 0 to 3 months.
Market Volatility (i.e. variable for volatility) VIX Index The Chicago Board Options Exchange (CBOE) Volatility Index reflects future volatility based on market behaviour. The index is based on the weighted average of the implied volatilities for a wide range of strike prices.
75

Measuring Financial Contagion Between Emerging Equity Markets Before and After The Onset of The Global Financial Crisis

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Measuring Financial Contagion between emerging equity markets before and after the onset of the global financial

MSc Financial Services 2013

James Fitzsimons 12012173

Word Count: 11,491

Supervisor: Fergal OBrien

probability of this shock occurring.

The following function describes the relationship

between Z and the probability of an extreme return shock;

Table 5.2: Correlations for total period

*. Correlation is significant at the 0.05 level (2-tailed).

Table 5.4: Correlations for pre-crisis period

.385 ** 1 .200 ** .403 ** .153

.079 ** .014 .096 ** .027 .069

.050 .000 .088 ** .027 .080

.184 ** .279 ** .148

.186 ** .540 ** .197

.180 ** .202 ** 1 .069 ** .062 * .117 ** .150

.051 .080 ** .062

.114 ** .211 ** .117

.108 ** .064 * .150

.107 ** .157 ** .104

.180 ** .165 ** .143

.118 ** .136 ** .110

.079 ** .125 ** .145

.109 ** .189 ** .110

.129 ** .591 ** .162

.173 ** .459 ** .213

.538 ** .655 ** .446

.193 ** .232 ** .209

.059 * .023 .104 ** .043 .138 ** .104 ** .086 ** .090

.079 ** .097 ** .153 ** .062

.014 .084 ** .192 ** .063

.096 ** .051 .114 ** .108

.027 .080 ** .211 ** .064

-.011 1 .086 ** .006 .050 .043 .094 ** .129

-.006 .086 ** 1 .247

.015 .006 .247 ** 1 .223 ** .202 ** .258 ** .275 .105

.016 .050 .554 ** .223

-.005 .043 .328 ** .202

-.001 .094 ** .359 ** .258

.006 .129 ** .341 ** .275

-.007 .024 .058 * .105

.061 * .078 ** .326 ** .187

.051 .021 .273 ** .083

.381 ** .090 ** .210 ** .120

.008 .326 ** .670 ** .484

.134 ** .143 ** .118 ** .075

.183 ** .131 ** .187 ** .141

.107 ** .180 ** .118 ** .079 .088

.157 ** .165 ** .136 ** .125

.104 ** .143 ** .110 ** .145 .080

.554 ** .328 ** .359 ** .341

1 .260 ** .341 ** .306 .097

.260 ** 1 .336 ** .215 .100

.341 ** .336 ** 1 .336 .078

.306 ** .215 ** .336 ** 1 .088

.097 ** .100 ** .078 ** .088

.301 ** .233 ** .319 ** .287

.223 ** .236 ** .199 ** .155

.206 ** .211 ** .177 ** .155

.630 ** .550 ** .617 ** .522 .362

-.021 .040 .116

.050 .008 .166

.385 1 .200 .403 ** .153

.079 .014 .096 .027 .069

.184 .279 .148

.186 .540 .197

.180 .202 1 .069 ** .062 * .117 ** .150

.114 .211 .117

.107 .157 .104

.180 .165 .143

.118 .136 .110

.079 .125 .145

.109 .189 .110

.129 .591 .162

.173 .459 .213

.538 .655 .446

.193 .232 .209

.059 * .023 .104 .043 .138 .104 .086 .090

.079 .097 .153 ** .062

.014 .084 .192 .063

.096 .051 .114 .108

.027 .080 .211 .064

-.011 1 .086 .006 .050 .043 .094 .129

.015 .006 .247 1 .223 .202 .258 .275 .105

-.001 .094 .359 .258

.006 .129 .341 .275

.061 * .078 .326 .187

.381 .090 .210 ** .120

.008 .326 .670 .484

.134 .143 .118 ** .075

.183 .131 .187 ** .141

.107 .180 .118 ** .079 .088

.157 .165 .136 ** .125

.104 .143 .110 ** .145 .080

.554 .328 .359 ** .341

1 .260 .341 .306 .097

.260 1 .336 .215 .100

.341 .336 1 .336 .078

.306 .215 .336 ** 1 .088

.097 .100 .078 ** .088

.301 .233 .319 ** .287

.223 .236 .199 ** .155

.206 .211 .177 ** .155

.630 .550 .617 ** .522 .362

.036 .021 .090 .326

.534 1 .425 .284 **

.622 1 .473 .631 ** .545

.511 .631 .550

.479 .771 .558

.483 .536 1 .045 .182 .318 .233

.169 .143 .182

.326 .297 .318

.243 .131 .233

.256 .184 .258

.338 .345 .359

.324 .253 .349

.257 .206 .311

.326 .298 .372

.398 .765 .467

.568 .626 .573

.677 .825 .771

.397 .326 .416

1 .466 .271 .458

.022 .140 .306 .154

.247 .324 .320

.204 .351 .268

.208 .332 .303

.256 .338 .324

.184 .345 .253

.258 .359 .349

.330 .286 .294

.702 .445 .536

.535 .472 1 .572 .111 .103

.525 .403 .572

.121 .108 .111

.089 .109 .103

.454 .485 .553

.319 .459 .375

.285 .419 .378

.753 .671 .758

.257 .070 .102