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Unobservable shocks as carriers of contagion


Dungey, M and Milunovich, G and Thorp, S, Unobservable shocks as carriers of contagion, Journal of Banking and Finance, 34, (5) pp. 1008-1021. ISSN 0378-4266 (2010) [Refereed Article]

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DOI: doi:10.1016/j.jbankfin.2009.11.006


We propose an identified structural GARCH model to disentangle the dynamics of financial market crises. We distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non-crisis markets, and the contagion imported to a tranquil domestic market from foreign crises. The model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses. To illustrate, we apply the method to data from the 19971998 Asian financial crisis which consists of a complicated set of interacting crises. We find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken. Impulse response functions for an equally-weighted equity portfolio show the increasing dominance of Korean and Hong Kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects.

Item Details

Item Type:Refereed Article
Keywords:contagion, structural GARCH
Research Division:Economics
Research Group:Econometrics
Research Field:Time-series analysis
Objective Division:Economic Framework
Objective Group:Macroeconomics
Objective Field:Monetary policy
UTAS Author:Dungey, M (Professor Mardi Dungey)
ID Code:67517
Year Published:2010
Web of Science® Times Cited:37
Deposited By:Economics and Finance
Deposited On:2011-03-04
Last Modified:2015-01-12

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