Contagion in Emerging Market Equities

Abstract

Adapting the definition from Forbes (2002), financial contagion is the significant increase in asset return correlation or transmission of volatility after a shock has occurred to a country or region. In this paper, we analyze country and regional equity data during the Thai Crisis of 1997 and the Credit Crisis of 2007. We derive regression models for equity returns and cross-sectional variance (dispersion) to determine relationships in these variables between key countries during the crisis periods. We find evidence of contagion between countries during the Thai Crisis and to lesser extent during the Credit Crisis.