Departamento de Economia

DEPARTAMENTO DE ECONOMIA
TEXTO PARA DISCUSSÃO

Nº 400
FINANCIAL MARKET CONTAGION IN THE ASIAN CRISIS1
Ilan Goldfajn
PUC/Rio
Taimur Baig
University of Illinois at Urbana-Chamapaign
Maio 1999
1
The authors thank Andrew Berg, Tito Cordella, Robert Flood, David Goldsbrough, Laura Kodres, Roberto
Rigobon, Paul Masson, Jonathan D. Ostry, and seminar participants at the IMF (Asia and Pacific
Department) and the World Bank (Research and Analytics Division) for helpful comments and suggestions.
We also thank Ned Rumpeltin for data assistance.
Abstract
This paper tests for evidence of contagion between the financial markets of Thailand,
Malaysia, Indonesia, Korea, and the Philippines. Cross-country correlations among
currencies and sovereign spreads are found to increase significantly during the crisis
period, whereas the equity market correlations offer mixed evidence. A set of dummy
variables using daily news is constructed to capture the impact of own-country and
cross-border news on the markets. After controlling for own-country news and other
fundamentals, the paper shows evidence of cross-border contagion in the currency and
equity markets.
JEL Classification Numbers: F30, F40, G15
Keywords: Contagion; Asian Crises; Financial Markets
Author’s E-Mail Address: baig@uiuc.edu, igoldfajn@imf.org
2
SUMMARY
This paper tests for evidence of contagion in the exchange rates, interest rates, equity, and
sovereign debt markets of Thailand, Malaysia, Indonesia, Korea, and the Philippines. A case
for contagion is made when the correlations among the markets increase significantly during
the crises as compared with tranquil levels.
The sovereign spreads show clear evidence of contagion in each of the pairwise relationships
tested. The results show a high degree of correlation and contagion between the markets of
Indonesia and Malaysia (except the domestic interest rate market).
Some of the equity markets in the region (e.g., Malaysia-Thailand and Philippines-
Indonesia), despite displaying high degrees of correlation during the crises, were not
significantly more correlated than in tranquil times. The correlations among sovereign
spreads are extremely high, indicating a near simultaneous deterioration in the perceived
default risk associated with the five countries.
The paper also uses a set of dummy variables to capture the impact of own-country and
cross-border news on the markets. The results show that even after controlling for own-
country news and other fundamentals, there is some evidence of cross-border contagion in
the currency markets. The regression analysis involving all the country dummies shows that
the currency markets in Thailand, Malaysia, the Philippines, and Korea were significantly
affected by bad news originating from Indonesia.
3
I. INTRODUCTION
Following the collapse of the Thai baht’s peg on July 2, 1997, the financial
markets of East and South-East Asia - in particular Thailand, Malaysia, Indonesia, the
Philippines, and Korea - headed in a similar, downward direction during late 1997 and
early 1998. The regional markets faced increasing pressure in the aftermath of the
devaluation of the baht, and this pressure was reflected in the subsequent unraveling of
the managed currencies in Malaysia and Indonesia. As the crises became full-blown,
intense foreign exchange and stock market turmoil spread in the entire region, culminating
in the collapse of the Korean won. News of economic and political distress, particularly
bank and corporate fragility, became commonplace in the affected countries, and it
appeared as though anything that brought one market down put additional pressure on the
other markets as well.
What was the driving force behind this transmission of shocks from one country
to the other? Was it fundamentals driven, or was it a case of irrational, herd mentality
displayed by panic-stricken investors? Could the reaction of the markets simply be
explained away by their historically close relationships? Finally, did some countries play
a larger role in terms of cross- border impact than others? These questions provide the
motivation behind this paper. We carry out three sets of analysis to tackle these issues.
First, we use correlations and VARs to see the extent of co-movement in the markets
during the crises. Second, we test if the correlations in these markets increased
significantly during the crises. Finally, we estimate the impact of own country and cross-
border news on selected financial markets of the region.
We use three and a half years of daily data (1995-1998) from the five selected
countries for our empirical analysis. We first study the correlation between the countries
of their respective foreign exchange, equity, interest rate, and sovereign debt markets,
examining which markets seemed more affected and postulating why this was the case.
We apply a Vector Auto Regression (VAR) methodology to estimate the impulse
responses to shocks in each of the currency and stock markets. This allows us to see if
there was indeed significant transmission of pressure in the respective markets, as well as
how persistent those shocks were.
Then, we test if the correlations in the various markets increase significantly

during the crisis period in comparison to historical, ‘tranquil’ period levels. If there is no
significant increase in the correlation, then it is likely that the pressure felt by the markets
is more due to some common cause or spillover effects. The policy implication would be
to focus on the source of the shock and try to tackle that first. On the other hand, if the
increase in correlation is significantly and substantially higher than the historical
correlations, then there is reason to suspect that sentiments have shifted. Under such
circumstances, there is an avenue for measures to calm the markets.
Finally, we distinguish between the impact of fundamentals and possible herd

behavior on stock markets and exchange rates. But our use of high frequency daily data
limits our capacity to obtain many representations of fundamentals. We remedy this by
4
creating a set of dummy variables to take into account the significant, market moving
news for the respective countries.
These dummies serve a dual purpose: they are proxies of own-country

fundamentals, as well as serving as a source of contagion for other countries. We estimate
the impact of these dummies, as well as other selected fundamentals, on the financial
markets through country-by-country regressions. We further analyze the residuals of these
regressions to see the extent of cross-border correlation after controlling for fundamentals.
The rest of the paper is organized as follows. Section II addresses some

conceptual issues, such as distinguishing between various concepts of contagion, as well
as the arguments involving procedures to test for significant increases in correlation
between two time periods. Section III examines the correlation among the exchange rate,
equity, and interest rate markets, and presents the results of the VAR analysis. Section IV
tests for increased correlation during the crisis period as compared to the tranquil period.
Section V introduces the news dummy variables, and analyzes the results of the
regressions with the dummies and other fundamentals. Section VI contains some
concluding remarks. The data and methodology description, and news chronology are
provided in the appendix.
II. CONCEPTUAL DISCUSSION OF CONTAGION
The fact that the financial crises in the Asian countries occurred almost at the same
time has led to the widespread use of terms like the Asian “Flu,” with the implication that
this is a case of contagion, where one country’s ill fate transmits to other, vulnerable
countries. Use of such terminology, however, tends to obscure several pertinent issues
involving simultaneous occurrence of financial crises. The term contagion itself is too
broad, as there are several distinct forms of shock that can transfer across borders, each
with very different policy implications.2 Masson (1997) highlights the various concepts of
contagion. The simultaneous movement of markets could be explained by common
external factors (e.g. a rise in U.S. interest rates or the devaluation of the yen), trade
linkage or third market competition related spillovers, or market sentiments. While any
of these factors could lead to what is perceived as contagious financial crises, it is crucial
to identify which one of them is actually driving the market mayhem. One also needs to
take into account if the presence of high degree of correlations is sufficient proof of
contagion. If markets are historically cross-correlated, then a sharp change in one market
will have an expected change in given magnitude in the other markets. If there is no
appreciable increase in correlations during the crisis period, then the markets are simply
reacting to each other, dictated by their traditional relationship. The scenario is quite
different if the correlations change substantially subsequent to the onset of the crises, in
which case one can indeed make the case for contagion. In this section, we analyze the
relevance of these various concepts in the context of the Asian crises.
2
For further work on contagion in emerging markets, see Forbes and Rigobon (1998), Glick and Rose (1998),
Kaminsky and Schmukler (1998), Agénor and Aizenman (1997), Sachs et al (1996), and Valdés (1995).
5
External or “monsoonal” effects, like the rise in German interest rates in 1992 (in
the context of the ERM crises) or the U.S. interest rate hike in 1994 (for the Tequila
episode), have been widely held to be triggers of contagious currency crises among
countries that are commonly affected.3 It has been argued that the sustained depreciation
of the Japanese yen vis-à- vis the U.S. dollar, beginning in the summer of 1995, was a
significant external factor contributing to the pressure faced by Asian markets. This
argument is highlighted by the fact that the five most affected countries - Thailand,
Malaysia, Indonesia, South Korea, and the Philippines - had substantial trade linkages with
Japan and the U.S. (see Table 1). The yen’s depreciation led to real appreciation of the
currencies that were predominantly pegged to the U.S. dollar, thus hurting the export
sectors of these countries. The declining exports in turn put pressure on the currencies
ahead of the 1997 crises. There are, however, several problems with this argument. As
argued in Chinn (1997) and Baig (1998), notwithstanding the depreciation of the yen, the
real exchange rates of the affected economies (with the exception of Thailand) did not
show any clear case of over-valuation relative to their historical movements. Furthermore,
there was a substantial time lag between the yen’s depreciation and the onset of the crises
in Asia.
While trade linkages between countries with geographic proximity can have an
impact in explaining spillover effects (see Eichengreen et al (1996), Glick and Rose
(1998)), they are not adequate to account for what happened in East Asia. The trade
linkages among the five countries in discussion are not very striking (see Table 1).
Consider the fact that the financial markets in the region came under severe pressure after
the collapse of the Thai baht on July 2, 1997. It is difficult to reconcile the trade linkage
argument with the transmission of exchange rate pressure from Thailand to other
countries of the Asia 5. The export share to Thailand constituted less than 4 percent of
total exports for each of the four countries in discussion, making intra-country trade an
unlikely source of pressure on financial markets.
Since the Asia 5 countries exported a large portion of their goods to US and
Japan, it is tempting to believe that some indirect trade linkage due to third market
competition was instrumental in repeated rounds of competitive devaluation. We don’t
find much evidence in support of this argument either. The Asia 5 countries do not share
very similar third-country export profiles that would amount to severe competitiveness
pressures. Going back to the Thai case, even after taking into account bilateral trade and
competition in third country, the importance of Thailand is rather small for the countries
concerned.
3
See Masson (1997).
6
Table 1. Exports Share of the Asia 5 in 1997
(As a percentage of total exports)
Thailand Malaysia Philippines Indonesia Korea US Japan
Thailand 4,6 1,2 2,0 1,8 19,8 15,0
Malaysia 3,7 1,3 1,5 3,2 18,3 12,4
Philippines 2,4 3,0 0,4 1,8 34,7 16,1
Indonesia 1,7 2,4 1,4 7,1 16,3 24,7
Korea 2,0 3,1 1,6 2,9 16,6 10,6
Source: Direction of Trade Statistics Quarterly: International Monetary Fund (June, 1998).
In addition to external shocks and spillovers, there exists a strand of explanation

that looks at the markets from the point of view of global investors. Calvo (1996) argues
that emerging markets are susceptible to herd mentality by investors. Since it is too costly
for investors to address the state of each economy, it is optimal for them to pull out of a
group of related markets simultaneously when they spot signs of nervousness in just one
of them. Masson (1997) argues somewhat along the same lines in his explanation of
investor psychology in the context of a multiple equilibria framework. He also argues that
small triggers can be precipitating factors for investors, leading to across the board loss
of confidence and a higher perceived risk of holding investment in a set of countries. As
investors follow each other and pull their money out, the herd behavior pushes these
countries to the bad equilibrium of financial distress.
The following sections empirically test for the existence of possible investor herd
behavior in Asia. We use two types of tests. The first test verifies if there is a significant
increase in correlations between the pre-crisis and the crisis period. We use a two sample
or heteroscedastic t-test for this purpose. If the correlations have increased significantly,
then there are grounds for believing that the markets have moved away from the
relationships dictated by traditional movements of fundamentals. On the other hand, if the
correlations are not significantly different, then markets are simply reacting to shocks that
are common-cause or spillover generated. The hypothesis behind this test is that the
correlation between the fundamentals has not increased substantially after the crisis and,
therefore, we can assign the increase in co-movements to shifts in market sentiments
affecting the entire region. We also apply a log-likelihood ratio test for the significance of
groupwise correlations. In the second test, we check whether after controlling for own
country news and other fundamentals, there is still an impact of cross border news on the
markets. The assumption is that own country news and the selected variables capture the
7
essential movements in fundamentals, and the other country dummy coefficients capture
contagion effects.
In the recent literature on the Asian crises, an alternative interpretation for the
contagion was advanced, stating that the spread of the crisis to several Asian countries
was the consequence of a “wake-up call” effect. Accordingly, after the collapse of the
Thai baht, investors started perceiving other countries differently, interpreting the same
fundamentals to be a sign of weaker economies. Since the observed fundamentals have not
changed, the paper will not be able to distinguish between the herd behavior and the
wake- up call effect. Therefore, one could interpret the results regarding herd behavior in
the rest of the paper as possible evidence in favor of the wake-up call effect.
III. FINANCIAL MARKET CORRELATIONS (EVIDENCE AND TESTS)
A. Currency Market Correlations
We begin our analysis by estimating correlation coefficients of the daily change in

nominal exchange rates. The sample period begins from the day of the baht devaluation,
July 2, 1997, and extends up to May 18, 1998. After calculating the overall correlation in
the sample period, we extend our analysis by repeating the exercise for sub-samples
consisting of three month windows, and rolling them till the end date. This allows us to
take a deeper look at the dynamics of cross-border correlations.
The full sample (see Table 2) shows positive coefficients for all pairs, with seven
out of ten pairs with correlations of .25 or higher. Indonesia’s cross-correlations with the
other countries stands out, with correlation coefficients of its daily change in exchange
rates with Korea, Malaysia, Philippines, and Thailand being .25, .36, .26, and .28,
respectively. The other cases of sizable correlations are Malaysia’s with the Philippines
and Thailand, .28 and .35 respectively, and Thailand-Philippines (.31). It is interesting to
note that despite the mayhem associated with the Korean won’s downward plunge in the
between October 1997 and January 1998, the full sample correlation matrix shows barely
any influence of the won on regional currencies.
The problem with using the full sample is that it smooths out a lot of shorter
duration interactions between the markets. For instance, events in Korea and Indonesia
had substantial impacts on the markets for periods of three to four months during certain
phases of the crises, but those movements are diminished by the use of the full sample.
The rolling correlations alleviate this problem to some extent (see Table 2). It is
instructive to note that the correlation between Indonesia and Korea is barely different
from zero in the first three months of the crisis. Subsequently, the correlation increases
substantially from November onwards, as both countries came under severe exchange rate
pressure. Korea’s correlation with Thailand nearly doubles from late 1997, and similar
increases are seen vis-à-vis Malaysia during the first three months of 1998. The rolling
correlations also reveal very high volatility in the region. The correlation coefficient
between Thailand and the Philippines go from -.22 to .75 from July-September 1997 to
December-February 1998.
8
The results also reveal that the Indonesian and Malaysian currencies were the most
consistently and highly correlated through the sample. Except for isolated sample
windows and with the exception of Indonesia, the Korean currency seems to be the
roughly uncorrelated with the rest of the currencies. Finally, despite being the primary
source of the shock that triggered the Asian crises, the Thai baht shows no sign of
appreciable correlation with other currencies, with the exception of Malaysia, until the
October-December window. The correlations become noticeably large in the last month
of 1997 and the first three months of 1998.
Table 2. Exchange Rate Correlation (Full sample and rolling panel with three month window)
LR test attempts to reject the null (7/1/1997 to 5/18/1998) LR Test: 37.38**

that all pairwise correlations are Indonesia Korea Malaysia Philippines
zero. Korea 0,25
* and ** imply rejection at a 10% Malaysia 0,36 0,10
and 5% level, respectively. Philippines 0,26 0,14 0,28
Thailand 0,28 0,10 0,35 0,31
(7/1/1997 to 9/30/1997) LR Test: 5.11 (8/1/1997 to 10/31/1997) LR Test: 5.79

Indonesia Korea Malaysia Philippines Indonesia Korea Malaysia Philippines
Korea -0,01 Korea 0,05
Malaysia 0,28 -0,10 Malaysia 0,38 -0,09
Philippines 0,080 0,10 0,27 Philippines 0,12 0,11 0,08
Thailand 0,01 -0,12 0,05 -0,22 Thailand 0,04 -0,06 0,22 -0,01
(9/1/1997 to 11/30/1997) LR Test: 11.66 (10/1/1997 to 12/31/1997) LR Test: 18.08*

Korea 0,02 Korea 0,53
Malaysia 0,60 0,03 Malaysia 0,31 0,05
Philippines -0,01 0,09 0,07 Philippines 0,30 0,16 0,06
Thailand 0,03 -0,10 0,20 0,04 Thailand 0,17 0,14 0,23 0,46
(11/1/1997 to 1/31/1998) LR Test: 16.81* (12/1/1997 to 02/28/1998) LR Test: 25.08**

Thailand 0,19 0,16 0,36 0,62 Thailand 0,39 0,21 0,58 0,75
(1/1/1998 to 3/31/1998) LR Test: 26.03** (2/1/1998 to 4/30/1998) LR Test: 26.34**

Thailand 0,49 0,08 0,57 0,63 Thailand 0,45 -0,06 0,51 0,59
9
Table 3. Stock Index Correlation (Full sample and rolling panel with three month window)

zero. Korea 0,09
Thailand 0,38 0,23 0,39 0,27
(7/1/1997 to 9/30/1997) LR Test: 13.37 (8/1/1997 to 10/31/1997) LR Test: 27.17**

Thailand 0,38 -0,05 0,19 -0,03 Thailand 0,57 0,19 0,40 0,26



B. Stock Market Correlations
The full sample panel with cross-border correlations for changes in stock indices
reveal fairly high level of co-movement in the region’s equity markets (see Table 3). As
with the currency correlations, the Malaysian and the Indonesian markets have the highest
degree of correlation. This is perhaps surprising given the fact that the countries do not
export more than 1.5 percent of their total exports to each-other (see Table 1), and there
are significant structural and political differences between the two countries, as well as
differing levels of financial sector development. The two countries also display sizable
correlations with the rest of the countries under consideration.4
In the rolling correlations, from August 1997 onwards, the Malaysian and Thai
stock markets demonstrate strikingly high degrees of correlation, up to .70 in the
December- February window. This mimics their close relationship in the foreign exchange
market during the same period. Similarly high degrees of correlations are seen in the
Malaysia-Philippines case. Overall, the stock market correlations (both full sample and
rolling panel) are larger when compared to the respective correlations in the currency
markets. For instance, the Malaysia-Thailand equity returns correlations in various
windows are greater by .1 to .2 than the currency market correlations counterparts.
C. Interest Rate Correlations

4
With the exception of relatively small correlation between Indonesia and Korea (.09)
We look at the cross-border correlations of interest rates with some reservations.
The overnight call rates used in this exercise may not be comparable given the variation
in the way they are set across countries. Besides, interest rates were widely used as tools
of monetary policy in all the countries in discussion; thus the rates reflected the policy
stance rather than market determined levels. During specific periods of severe market
mayhem, interest rates were raised to very high levels for a short period to tackle
speculative attacks in Indonesia, Malaysia and the Philippines, resulting in extreme outliers
in the data.5 As they were used as monetary policy instruments, the interest rates are not
necessarily reflective of market forces. As illustrated in Table 7, the interest rate
correlations vary widely from pair to pair, with 5 of the correlations negative and the other
5 positive. The Indonesia-Korea, Indonesia-Thailand and Thailand-Malaysia interest rate
correlations appear to be consistent with their currency and stock market relationships.
Other than these, it is hard to discern much from the results.6
D. Sovereign Spread Correlations
A superior alternative to domestic interest rates in investigating the market

assessment of country risk is the interest rates on foreign currency denominated debt that
is traded in off-shore markets. We obtain such rates on selected dollar denominated debt
for the five countries, and then calculate the spread by subtracting the U.S. treasury bill
yield with corresponding maturity (see Appendix 1 for details). The resulting spreads are
ideal proxies for pure default risk for the respective countries.
The cross-correlation matrix of the sovereign spreads presents striking results (see
Table 4). The cross country correlations are extremely high, ranging from .51 (Malaysia-
Thailand) to as much as .91 (Indonesia-Malaysia). Previously observed high correlations
between Indonesia-Malaysia continue to demonstrate similar results. Even pairs that show
relatively small degree of correlation in the currency and the stock markets, e.g Thailand-
Philippines, are marked by remarkably high coefficients (.90 in this case). This extremely
high degree of correlation between the spreads indicates that the global investors treated
these five countries’ financial fragility with a broad stroke by demanding high risk
premiums for all of them during the crisis. The probability of private debt default was
perceived to have increased dramatically in all of these countries, and nervousness about
one market transmitted to other markets readily.
The rolling correlations reveal salient aspects of the market dynamics. Beginning
with the Thai crisis, the cross-border correlations among Korea, Indonesia, and Thailand
go up substantially, and remain uniformly strong until early 1998.7 The most glaring
illustration of this is the September-November window, when the cross-correlations
5
For example, overnight interest rates were raised to 91 percent on August 20 in Indonesia.
6
For brevity, we omit the rolling correlations for the interest rates; the results are not very instructive.
7
When compared with the correlations in June, 97, the Korea-Indonesia, Thailand-Indonesia, and Korea-
Thailand correlations increase from .56, .60, .22 to .95, .92, and .89 respectively in the July-September window.
11
between Korea-Indonesia, Thailand-Indonesia, and Korea-Thailand are .92, .95, and .97,
respectively. While the Philippines’ stock and currency markets do not show very high
degree of correlation with these three countries, its risk premium appears to be markedly
tied to the fortune of them. From July to December 1997, the Philippines spreads are
strongly correlated with these three countries.
Following the correlations of Malaysia with the rest of the pack reveals that until
early 1998, they were relatively less correlated with the markets in Thailand and the
Philippines, while remaining fairly well correlated with Indonesia and Korea. However,
as the spreads for the other countries came down and showed some stability, Malaysia’s
spreads kept rising and persisted at very high levels (see Figure 9). In the January-March
window, Malaysia’s spreads were negatively correlated with all the countries in the
sample, ranging from -.09 with Indonesia to -.63 with the Philippines. The correlations
recover somewhat in April. It must be noted here though that the negative correlations do
not necessarily reflect a comparatively worse financial state in Malaysia. During the last
few months of the sample when it appears as though Thailand was recovering while
Malaysia remained stuck in financial distress, the latter has consistently commanded
relatively lower spreads.
Table 4. Sovereign Spreads Correlation (Full sample and rolling panel with three month window)

zero. Korea 0,74
Thailand 0,66 0,82 0,51 0,90



Philippines 0,29 -0,06 0,15 Philippines 0,53 0,50 0,08

Malaysia -0,09 -0,54 Malaysia 0,50 0,06
Philippines 0,57 0,69 -0,63 Philippines 0,16 0,03 -0,42
Thailand 0,31 0,88 -0,52 0,78 Thailand 0,42 0,16 0,85 -0,46
12
E. VAR Analysis
The Asian crises were marked by periods of market mayhem when currencies and
stock markets in the region tumbled in waves, with declining markets pushing each-other
in a circular and mutually reinforcing manner. It is very difficult to isolate the magnitude
of shocks that transmitted from one market to the other. In order to discern the patterns
of currency and stock market pressure, we take advantage of the Vector Auto-regression
(VAR) methodology. The methodology is useful in this context as it recognizes the
endogeneity of all the variables in the system. It also moves away from our earlier focus
on contemporaneous correlations, and allows for the impact of lagged values of the
variables. To keep the analysis simple, we do not estimate VARs that include overlapping
markets (i.e. incorporating both exchange rates and stock market returns on the right hand
side), but rather look at the interactions between the five countries one market at a time.
For a given country, the sample starts from the day that country’s currency peg unraveled8
and ends on May 18, 1998.9 We then run a five variable VAR for the exchange rates,
obtain the estimated impulse response function for the shocks originating from the given
country, and then do the same for the stock market data. We choose a lag length of one
day, and do not find improvement in our model by including more lags. This exercise was
repeated for all five countries, giving us a total of 10 impulse response graphs. By virtue
of this, we make use of the data that spans a country’s financial turmoil phase, and follow
the impact of one standard deviation innovation in its currency and stock market on the
rest of the markets under study. The issue of ordering the variables for generating the
impulse response functions turned out to be inconsequential, as changing the ordering did
not have any significant impact in the results.
Figures 1 through 5 present the impulse response graphs. Shocks originating from
Thailand’s currency market (see Figure 1) have a significant impact on the markets of
Malaysia, Indonesia and the Philippines, i.e. a depreciation of the baht led to an immediate
depreciation of the currencies in these countries. The impact from the shocks tends to
disappear after about 4 days. In the stock market, Thailand’s movements had a significant
and corresponding reaction from all of the countries in discussion.
8
In the case of Korea, we chose the day the won began its downward fall.
9
The sample start date for Thailand, Malaysia, the Philippines, Indonesia, and Korea were July 2, July 14, July
11, August 14, and November 6 respectively. All sample end dates are May 18, 1998.
13
Figure 1
Exchange Rate VAR Stock Market VAR
Sample: 07/02/1997 - 05/18/1997 Sample: 07/02/1997 - 05/18/1997

Impulse Response ordering for exchange rates: Impulse Response ordering for stock market returns
Thailand =>Malaysia => Philippines => Indonesia => Korea Thailand => Malaysia => Philippines => Indonesia => Korea
Response to One S.D. Innovations in Thailand ± 2 S.E. Response to One S.D. in Thailand ± 2 S.E.
Response of Indonesia Response of Malaysia Response of Indonesia Response of Malaysia

0.020 0.010 0.020
0.020
0.008
0.015 0.015
0.015
0.006
0.010 0.010
0.010
0.004
0.005 0.005
0.005
0.002
0.000 0.000
0.000 0.000
-0.005 -0.002 -0.005

-0.005
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
Response of Philippines Response of Korea Response of Philippines Response of Korea

0.008 0.004 0.012 0.014
0.010 0.012
0.006
0.002
0.010
0.008
0.004
0.008
0.000
0.006
0.002 0.006
0.004
-0.002 0.004
0.000
0.002
0.002
-0.004
-0.002
0.000 0.000
-0.004 -0.006 -0.002 -0.002

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
14
Figure 2
Sample: 07/14/1997 - 05/18/1997 Sample: 07/14/1997 - 05/18/1997

Malaysia => Thailand => Philippines => Indonesia => Korea Malaysia => Thailand => Philippines => Indonesia => Korea
Response to One S.D. Innovations in Malaysia ± 2 S.E. Response to One S.D. Innovations in Malaysia ± 2 S.E.
Response of Thailand Response of Indonesia Response of Thailand Response of Indonesia

0.010 0.015
0.030 0.020
0.008 0.025
0.015
0.010
0.006 0.020
0.010
0.015
0.004 0.005
0.010
0.005
0.002
0.005 0.000
0.000 0.000
0.000
-0.002 -0.005
-0.005 -0.005
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of Philippines Response of Korea Response of Philippines Response of Korea

0.008 0.010 0.016 0.015
0.008
0.006 0.012
0.010
0.006
0.004 0.008
0.004
0.005
0.002
0.002 0.004
0.000
0.000
0.000 0.000
-0.002
-0.002 -0.004 -0.004 -0.005

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
15
Figure 3
Sample: 08/14/1997 - 05/18/1997 Sample: 08/14/1997 - 05/18/1997

Indonesia => Thailand =>Malaysia => Korea => Philippines Indonesia => Thailand =>Malaysia => Korea => Philippines
Response to One S.D. Innovations in Indonesia ± 2 S.E. Response to One S.D. Innovations in Indonesia ± 2 S.E.
Response of Thailand Response of Malaysia Response of Thailand Response of Malaysia

0.008 0.012 0.016 0.020
0.010
0.006
0.012 0.015
0.008
0.004
0.006 0.008 0.010
0.004
0.002
0.004 0.005
0.002
0.000
0.000 0.000 0.000
-0.002 -0.002
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 -0.004 -0.005
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of Philippines Response of Korea

Response of Philippines Response of Korea
0.020
0.008 0.006 0.012
0.006 0.004 0.015

0.008
0.004 0.002
0.010
0.004
0.002 0.000
0.000 -0.002 0.005

0.000
-0.002 -0.004
0.000
-0.004
-0.004 -0.006
-0.006 -0.008 -0.005

-0.008
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
16
Figure 4
Sample: 11/06/1997 - 05/18/1997 Sample: 11/06/1997 - 05/18/1997

Impulse Response ordering: Impulse Response ordering:
Korea => Indonesia => Thailand => Malaysia => Philippines SKOR => SIND => STHAI => SMLS => SPHIL
Response to One S.D. Innovations in Korea ± 2 S.E. Response to One S.D. Innovations in Korea ± 2 S.E.
Response of Thailand Response of Indonesia Response of Thailand Response of Indonesia

0.008 0.03 0.016 0.020
0.006
0.015
0.02 0.012
0.004
0.010
0.01 0.008
0.002
0.005
0.000
0.00 0.004
0.000
-0.002
-0.01 0.000
-0.004 -0.005
-0.006 -0.02 -0.004 -0.010

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of Philippines Response of Malaysia Response of Philippines Response of Malaysia

0.012
0.008 0.008 0.016
0.006
0.010
0.006
0.012
0.004 0.008
0.004
0.002 0.006 0.008
0.002 0.000
0.004
0.004
-0.002
0.000 0.002
-0.004
0.000
-0.002 0.000
-0.006
-0.002
-0.004 -0.008 -0.004
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
17
Figure 5
Sample: 7/11/1997 - 05/18/1997 Sample: 7/11/1997 - 05/18/1997

Philippines => Thailand => Malaysia => Indonesia => Korea Philippines => Thailand => Malaysia => Indonesia => Korea
Response to One S.D. Innovations ± 2 S.E. Response to One S.D. Innovations in Philippines ± 2 S.E.
Response of Thailand Response of Malaysia Response of Thailand Response of Malaysia

0.010 0.008 0.012
0.020
0.010
0.008
0.006
0.015
0.008
0.006
0.006
0.004
0.010
0.004 0.004
0.002 0.002 0.005

0.002
0.000
0.000 0.000
0.000
-0.002
-0.002 -0.002 -0.004

-0.005
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
Response of Indonesia Response of Korea Response of Indonesia Response of Korea

0.020 0.006 0.015
0.020
0.015 0.004 0.010

0.015
0.010 0.002
0.005
0.010
0.005 0.000
0.000
0.005
0.000 -0.002
-0.005
0.000
-0.005 -0.004
-0.010 -0.006 -0.010

-0.005
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
18
Of the remaining impulse response functions, Malaysia (see Figure 2)
demonstrates similar results. All the four countries responded to shocks in its currency and
stock markets with the right sign and significance. Indonesia (see Figure 3) had the most
impact on the markets of Thailand and Malaysia, whereas the evidence of its impact on
the Philippines and Korea is weaker. Korea (Figure 4) stands out in this exercise as the
country that did not react to or impact significantly upon the rest of the countries. The
Philippines (Figure 5) had only a modest impact on Malaysia and Thailand.
The common element in the impulse response functions is the relatively stronger
reaction by the equity markets to shocks in a given country, when compared with
corresponding results in the currency markets. This is consistent with our earlier results.
However, it must be noted that evidence of strong interactions between markets is not
sufficient evidence of contagion. As seen in the next section, despite the higher
correlations, stock market dynamics changed relatively less than the currency markets’
during the Asian crises.
The following contains a summary of the correlations and impulse response

results.
CORRELATIONS SUMMARY
Exchange Rates Stock Markets Interest Rates Sovereign Spreads
* From October * The Malaysian and * With the exception of * From July to
onwards, correlations the Indonesian stock the Philippines, all the December, '97, the
between Indonesia and markets have the countries had positive Philippines' spreads are
Korea increase highest degree of correlations. strongly correlated with
substantially. correlation among all Thailand, Korea and
the pairs. Indonesia.
* Rolling correlations * In general,

reveal high volatility. correlations are greater
than the currency
* Indonesia and markets'.
Malaysia are
consistently correlated
* In general, the
Korean won is
uncorrelated with the
rest of the countries
(exception: Indonesia)
19
IMPULSE RESPONSE SUMMARY
response to one standard deviation innovation (only significant results are

reported; we omit the country responses to own shocks)
Exchange Rates
Thailand Malaysia Philippines Korea Indonesia
Shocks
originating from:
Thailand + + +
Malaysia + + +
Philippines + +
Korea
Indonesia + +
Stock Markets
Thailand + + + +
Malaysia + + +
Philippines + + +
Korea +
Indonesia + + +
20
IV. TESTING FOR SIGNIFICANT INCREASE IN CORRELATIONS
While the full sample and rolling correlations help us identify the pattern of
contagion, they don’t tell us whether these correlations are significantly different from
market behavior in tranquil times. To address this issue, we apply the two-sample or
Heteroscedastic t-test described in the appendix. For the currency, equity price index, and
interest rates, we define the crisis period as the one analyzed above, which is July 2, 1997
to May 18, 1998. For the tranquil phase, we obtain the corresponding data from January
1, 1995 to December 31, 1996.10 We run the same cross-correlations, and then test for a
significant increase in correlations during the crisis period. The results are presented in
Tables 5-8. The crisis period correlations that are greater than the corresponding tranquil
period correlation within a 1 percent level of significance are highlighted. Due to data
limitations, we restrict the crisis sample for sovereign spreads from April 11, 1997 to June
30, 1997. While this is a considerably shorter period than the other cases, we believe that
it nevertheless captures the market dynamics prior to the crisis.
The tranquil period correlations for the exchange rates in every single pair are
barely different from zero. This observation must however be seen in the context of the
practice of managed exchange rates prior to the crises in all the countries in discussion.
In light of the fact that most of the currencies moved very little during the tranquil period,
it is hardly surprising that the correlations in the crisis period are significantly greater than
every single pairwise correlation in the tranquil period (see Table 5).
The stock market tests, however, paint a very different picture. In six out of the
ten pairs, the stock market correlations are positive and large. Among the striking
correlations, Indonesia-Malaysia, Indonesia-Thailand, and Malaysia-Thailand are notable,
with coefficients of .37, .32, and .41 respectively. Despite historically high levels of
correlation, we find evidence that in the cases of Indonesia-Malaysia and Indonesia-
Thailand, the correlations were significantly higher in the crisis period (see Table 6). The
Philippines showed large correlations with all the countries (except Korea) during both
the tranquil and crisis period, and none of these results increase significantly in the latter
period. Overall, the evidence for contagion in the stock markets is mixed at best, as the
analysis of the tranquil period demonstrated that there was substantial historical co-
movement in many of the markets.
In the case of the interest rates, with the exception of Korea-Thailand (.37), there
are no cases of noticeable correlations in the tranquil phase (see Table 7). In six out of ten
cases, cross-border correlations are significantly greater in the crisis period.
10
To get a comparative idea about the behavior of the variables during the crisis and tranquil phase, see Figures
6, 7, 8, and 9.
21
Result of Heteroscedastic Test
Table 5. Exchange Rates Table 6. Stock Market Returns

crisis period crisis period
(07/01/97 -05/18/98) LR Test: 37.38** (07/01/97 -05/18/98) LR Test: 60.53**
Korea 0.25*** Korea 0.09***
Malaysia 0.36*** 0.10*** Malaysia 0.45*** 0.26***
Philippines 0.26*** 0.04*** 0.28*** Philippines 0,44 0.16*** 0,38
Thailand 0.28*** 0.10*** 0.35*** 0.31*** Thailand 0.38*** 0.23*** 0,39 0,27
tranquil period tranquil period
(01/01/95 -12/31/96) LR Test:2.84 (01/01/95 -12/31/96) LR Test:111.46**
Korea -0,03 Korea -0,03
Philippines 0,025 -0,03 -0,04 Philippines 0,46 0,02 0,41
Thailand 0,03 -0,003 0,09 -0,05 Thailand 0,32 0,005 0,41 0,30
Table 7. Interest Rates Table 8. Sovereign Spreads

crisis period crisis period
(07/01/97 -05/18/98) LR Test: 64.60** (07/01/97 -05/19/98) LR Test: 538.37**
Korea 0.41*** Korea 0.74***
Malaysia 0.07*** 0.43*** Malaysia 0.91*** 0.69***
Philippines -0,17 -0,32 -0,06 Philippines 0.73*** 0.83*** 0.59***
Thailand 0.37*** 0.42*** 0.27*** -0,25 Thailand 0.66*** 0.82*** 0.51*** 0.90***
tranquil period tranquil period
(01/01/95 -12/31/96) LR Test: 54.95** (04/11/97 -06/30/97) LR Test: 24.37**
Korea -0,14 Korea 0,12
Malaysia -0,14 -0,10 Malaysia 0,47 -0,28
Philippines 0,05 -0,12 0,06 Philippines -0,11 -0,32 0,27
Thailand -0,07 0,37 -0,22 0,13 Thailand 0,18 -0,21 0,48 -0,08
LR test attempts to reject the null that all pairwise correlations are zero.
Each pairwise correlation is tested for the null that the correlation is zero.
* , ** and *** denote rejection at a 10%, 5% , and 1% levels respectively.
Source: Bloomberg and IMF Staff Estimate
22
FIGURE 6. NOMINAL EXCHANGE RATE (vis-avis US$)
Tranquil vs Crisis
2400 Indonesia 18000 Indonesia
2300 14000
2200 10000
2100 6000
2000 2000
02/01/95 19/06/95 04/12/95 20/05/96 04/11/96 01/07/97 01/10/97 01/01/98 01/04/98
30 Thailand 60 Thailand
55
28 50
26 45
40
24 35
22 30
25
20 20
02/01/95 19/06/95 04/12/95 20/05/96 04/11/96 01/07/97 01/10/97 01/01/98 01/04/98
900 Korea Korea

2000
850
1500
800
750 1000
700 500
02/01/95 19/06/95 04/12/95 20/05/96 04/11/96 01/07/97 01/10/97 01/01/98 01/04/98
3 Malaysia 5,00 Malaysia

2,8 4,50
4,00
2,6
3,50
2,4
3,00
2,2 2,50
2 2,00
02/01/95 19/06/95 04/12/95 20/05/96 04/11/96 01/07/97 01/10/97 01/01/98 01/04/98
30 Philippines Philippines
45
28 40
26 35
24 30
22 25
20 20
02/01/95 19/06/95 04/12/95 20/05/96 04/11/96 01/07/97 01/10/97 01/01/98 01/04/98
Source: Bloomberg, IMF staff estimates
23
FIGURE 7. STOCK MARKET INDICES
Tranquil vs Crisis
700
Indonesia 800 Indonesia
600
700
600
500 500
400
400
300
300 200
02/01/95 02/06/95 02/11/95 02/04/96 02/09/96 01/07/97 01/10/97 01/01/98 01/04/98

1500 700
1300 600
1100 500
900 400
700 300
500 200
02/01/95 02/07/95 02/01/96 02/07/96 01/07/97 01/10/97 01/01/98 01/04/98
1100 Korea 900 Korea

800
1000
700
900 600
800 500
400
700
300
600 200
02/01/95 02/07/95 02/01/96 02/07/96 01/07/97 01/10/97 01/01/98 01/04/98
1300 Malaysia 1200 Malaysia

1200
1000
1100
1000 800
900
800 600
700
400
600
500 200
02/01/95 02/06/95 02/11/95 02/04/96 02/09/96 01/07/97 01/10/97 01/01/98 01/04/98
3500 Philippines 3000 Philippines

2600
3000
2200
2500
1800
2000
1400
1500 1000
02/01/95 02/07/95 02/01/96 02/07/96 01/07/97 01/10/97 01/01/98 01/04/98
24
FIGURE 8. OVERNIGHT CALL RATES (in percent per annum)
Tranquil vs Crisis
30 Indonesia 100 Indonesia

25 80
20
60
15
40
10
5 20
0 0
02/01/95 02/06/95 02/11/95 02/04/96 02/09/96 01/07/97 23/09/97 16/12/97 12/03/98
25 25
20 20
15 15
10 10
5 5
0 0
02/01/95 02/07/95 02/01/96 02/07/96 01/07/97 23/09/97 16/12/97 12/03/98
30 Korea 35 Korea
25 30
20 25
15 20
10 15
5 10
0
5
02/01/95 02/07/95 02/01/96 02/07/96 01/07/97 23/09/97 16/12/97 12/03/98
12 Malaysia 40 Malaysia
10 30
8
6 20
4
10
2
0 0
02/01/95 02/07/95 02/01/96 02/07/96 01/07/97 23/09/97 16/12/97 12/03/98
60 Philippines 120 Philippines

50 100
40 80
30 60
20 40
10 20
0 0
02/01/95 02/07/95 02/01/96 02/07/96 01/07/97 23/09/97 16/12/97 12/03/98
25
FIGURE 9. SOVEREIGN SPREADS (in basis points)
1200 Indonesia 600 Thailand
1000 500
800 400
600 300
400 200
200 100
0 0
11/04/97 11/07/97 11/10/97 11/01/98 11/04/98 11/04/97 11/07/97 11/10/97 11/01/98 11/04/98
800 Korea 300 Malaysia

700
250
600
500 200
400
150
300
200 100
100 50
0
0
11/04/97 11/07/97 11/10/97 11/01/98 11/04/98
11/04/97 11/07/97 11/10/97 11/01/98 11/04/98
600 Philippines
500
400
300
200
100
0
11/04/97 11/07/97 11/10/97 11/01/98 11/04/98
26
The tranquil period correlation matrix for the sovereign spreads, despite being
limited by the sample size, is instructive (see Table 8). While Indonesia-Malaysia (.47) and
Thailand-Malaysia (.48) are the only two countries with large correlations in the tranquil
phase, all of the pairwise correlations increased significantly and substantially in the crisis
phase. Thus the choice of dividing the samples from the day of the baht devaluation is
deemed sensible, as it captures the breaking point in market behavior in all the different
variables studied in this section.
In sum, the analysis demonstrates that there was a clear case of increased
correlations in the currency markets. This result comes with the caveat that the currencies’
movements were minimal prior to the crises due to the existence of pegs. The evidence
is not very clear in the case of the equity markets and the domestic call rates. The spreads
on dollar denominated debt, representing pure default risk, display the most striking
degree of correlations and evidence of contagion.
V. INCORPORATING DUMMY VARIABLES
A. Dummy Variables
Following Ganapolsky and Schmukler (1998) and Kaminsky and Schmukler

(1998), we use dummy variables to quantify the impact of policy announcements and
other news on the respective markets. A set of ten dummy variables, representing good
news and bad news in each country, is used to estimate the impact of news. For every
country, we assume that its own news is a proxy for changes in fundamentals, whereas
changes in the fortune of another country is a potential source of contagion. Our objective
is twofold: first, we regress the variables under consideration on own country dummies
and other selected fundamentals. We then take the residuals of these regressions and
analyze their cross-correlations. Second, we repeat the exercise with all ten dummies on
the right hand side to evaluate the impact of cross-border news.
In order to create the dummy variables, we scrutinized the daily reports from
Reuters, Bloomberg, Financial Times, CNN-fn, and IMF departmental news archives, and
took into account significant country-specific news events. We did not simply seek out the
news behind every occasion when the markets moved significantly. Rather than relying
on market commentaries that invariably contain some explanation for a given day’s market
performance, we concentrated on news purely based on the criteria of whether the news
event represented changes in the fundamentals of an economy. We broke down the news
in two broad categories of good and bad news. In order to filter out the noise associated
with daily news events from content that represents fundamentals of a given country, we
used the following specific criteria:
Good News:
a. Successful formation of bailout arrangements;

b. Announcement of rescue package by international organizations;
c. Better-than-expected economic news;
27
d. Specific measures to stabilize the markets.
Bad news:
a. Collapse of the currency regime or of long-standing financial arrangements;

b. Breakdown in negotiation with multilateral agencies;
c. Large scale bankruptcy or firm closure;
d. Credit rating downgrade;
e. Worse than expected announcements about debt exposure, inflation, or growth
prospects, confusing policy moves;
f. Threats or announcement of capital controls imposition;
g. Resignation or firing of high profile officials;
i. Civil unrest.
News that came out at the end of a business day was dated the following day. The
news were checked across more than one source to verify date and content. The
information was then used to create five good news and five bad news dummies for the
respective countries. A chronology of the news events used to construct the dummy
variables is provided in Appendix 2.
B. Impact of Own News and Other Fundamentals
In this section, we present the results of the impact of own country news and other
fundamentals on the financial markets. In addition to the own country dummies, we add
two more variables on the right hand side: the daily stock market return in the U.S. (S&P
500) and the yen-dollar exchange rate. These two variables are included as additional
proxies of fundamentals. The yen-dollar rate also accounts for the monsoonal effect.
Table 9-A presents the results of the exchange rate regressions. The results are
strong across the board. Bad news from own country had strong downward impact on the
exchange rates in all the countries in discussion. Perhaps more interestingly, with the
exception of Korea and the Philippines, the other three countries’ exchange rates reacted
favorably and significantly to good news events. The exchange rate reaction to negative
news was 1.7 percent and 2 percent for Malaysia and Thailand respectively. Indonesia’s
exchange rate, marked by extraordinary volatility even by the standards of the regional
mayhem, reacted with greater magnitude in both directions. The bad news dummy
coefficient is 0.044, while the good news coefficient estimate is -0.059. The U.S. stock
market impacted favorably on the currencies of Thailand and Malaysia. The estimates of
the impact of the yen-dollar exchange rate are quite strong. Except for Indonesia, each of
the four other countries’ exchange rates faced pressure whenever the yen depreciated.
This is hardly surprising, given their large trade shares with Japan. A one percentage point
depreciation of the yen brought a 0.35 to 0.82 percent depreciation of the currencies.
28
Table 9-A. Regression Results with own country Dummy and other Fundamentals
Dependent Variable: Change in Nominal Exchange Rate
Thailand Malaysia Korea Indonesia Philippines
Constant 0,001 0,002 0,001 0,004 0,002

(0.40) (1.08) (0.23) (0.83) (1.17)
Bad News 0,020 0,017 0,021 0,044 0,043

(4.13)** (3.75)** (2.57)** (3.71)** (3.34)**
Good News -0,022 -0,016 0,001 -0,059 -0,014

(3.37)** (2.40)** (0.04) (4.28)** (1.05)
US Stock Index -0.248 -0,226 -0,238 -0,494 -0,012

(2.16)** (1.88)* (1.35) (1.50) (0.11)
Yen/Dollar Rate 0,375 0,828 0,583 0,657 0,35

(2.13)** (4.56)** (2.26)** (1.29) (1.95)**
2
Adjusted R 0,17 0,21 0,06 0,17 0,07
Number of Obs. 180 163 162 183 183
Absolute values of t-statistics in parenthesis; * denotes 10% significance level, ** denotes 5% significance level
Except for the dummies, all variables are in log first differences
Table 9-B. Residuals Correlation
Sample: 07/02/97 - 05/18/98 LR Test: 16.08*

Indonesia Korea Malaysia Philippines
Korea 0,21
Malaysia 0,21 0,11
Philippines 0,18 0,14 0,20
Thailand 0,16 0,12 0,21 0,23
* and ** imply rejection at a 10% and 5% level, respectively.
29
The residuals from these regressions, having controlled for fundamentals,
represent another measure of contagion. In Table 9-B we present the residual correlations.
The results appear to have diminished somewhat from the original correlations observed
in Table 2. However, LR test reveals statistically significant groupwise correlation of the
residuals. Thus, despite controlling for fundamentals, the correlation between the
currencies remain substantial and significant. Contagion effects persist well above and
beyond the identified fundamentals. The evidence also proves that the financial markets
correlations are not principally driven by some big news events.
The regression results with the stock prices are also strong (see Table 10-A).
Except for the Phillippines, all the other stock markets react significantly, with the right
sign to bad and good news events. In Thailand, Korea, and Indonesia, reactions to bad
news were of a greater magnitude than to good news. All five stock markets in the sample
were strongly correlated the U.S. stock market. The yen-dollar rate, on the other hand,
was significant only for Korea. The negative coefficient associated with the yen implies
that a percentage depreciation of the Japanese currency led to a 0.6 percent decline in the
Korean stock market. This result is reinforced by the yen’s persistent decline during the
entirety of the Asian crises, which put inordinate pressure on the Korean exports industry.
After controlling for these variables, the residual correlations (see Table 10-B) remain
relatively high and statistically significant. Once again, own country news and selected
fundamentals do not account adequately for the correlations observed among the regional
stock markets.
We extend our analysis to domestic interest rates and sovereign spreads (see
Tables 11 and 12). In these regressions, the news dummies do not reveal any consistent
patterns. Very few of the regressors are significant, and often have counter-intuitive signs.
The regressions fail to explain much of the movements in interest rates or spreads. The
residual correlations are virtually identical to the raw correlations. The results for the
interest rates can be reconciled with our earlier argument that the interest rates used in this
exercise are not reflective of market forces. Therefore, we don’t expect them to react like
other market variables, such as the exchange rate or stock market index. The lack of a
consistent result on the sovereign spreads, on the other hand, seems to indicate that the
debt market is not driven by fundamentals. This argument is supported by the fact that the
raw correlations between the spreads, observed in the previous sections, were very high.
This high degree of correlation indicates that the sovereign debt market is more prone to
be driven by contagion factors along the lines of Masson (1997). The co-movements of
the spreads are well above anything that can be accounted through changing fundamentals,
and are possibly due to investor herd behavior .
30
Table 10-A: Regression Results with own country Dummy and other Fundamentals
Dependent Variable: Change in Stock Market Index
Constant -0,001 -0,004 -0,003 -0,0004 -0,003

(0.47) (1.81)* (1.13) (1.60) (1.45)
Bad News -0,025 -0,023 -0,026 -0,013 -0,018

(3.36)** (3.51)** (3.02)** (1.90)* (1.01)
Good News 0,021 0,053 0,018 0,014 0,013

(2.21)** (5.34)** (2.23)** (1.81)* (0.73)
US Stock Index 0,493 0,629 0,456 0,725 0,58

(2.86)** (3.62)** (2.37)** (3.87)** (3.50)**
Yen/Dollar Rate -0,208 -0,319 -0,67 -0,163 0,04

(0.79) (1.23) (2.36)** (0.56) (0.14)
2
Adjusted R 0,11 0,26 0,14 0,11 0,06
Number of Obs. 170 170 172 174 179
Except for the dummies, all variables are in log first differences
Sample: 07/02/97 - 05/18/98 LR Test: 34.97**

Korea 0,15
Malaysia 0,33 0,21
Thailand 0,35 0,17 0,30 0,15
31
Dependent Variable: Interest Rates
Constant 17,91 8,77 17,33 33,26 17,07

(73.42)** (33.91)** (40.01)** (23.43)** (19.98)
Bad News -1,18 -0,078 2,55 0,774 5,13

(1.37) (0.10) (1.52) (0.20) (0.63)
Good News -2,46 -0,218 4,91 7,24 3,05

(2.13)** (0.17) (3.36)** (1.57)* (0.37)
US Stock Index 24,25 13,87 -2,05 14,19 122,17

(1.21) (0.65) (0.05) (0.12) (1.63)
Yen/Dollar Rate -8,21 27,28 -21,85 119,68 59,06

(0.26) (0.85) (0.41) (0.71) (0.52)
2
Adjusted R 0,04 0,01 0,05 0,01 0,02
Number of Obs. 172 177 179 180 182
Except for the dummies and the dependent variable, all variables are in log first differences
Sample: 07/02/97 - 05/18/98 LR Test: 48.42**

Korea 0,37
Malaysia 0,02 0,36
Philippines -0,17 -0,29 -0,02
Thailand 0,38 0,41 0,26 -0,27
32
Dependent Variable: Sovereign Spreads, in basis points
Constant 265,41 114,62 235,67 349,15 311,56

(28.37)** (15.72)** (22.82) (18.35) (58.09)**
Bad News -14,69 -12,37 116,93 93,01 -15,74

(0.44) (0.53) (3.01)** (1.71)* (0.31)
Good News -47,07 28,02 122,71 254,43 -45,76

(1.08) (0.79) (3.56)** (4.02)** (0.89)
US Stock Index -171,48 278,82 -850,83 37,27 -41,68

(0.22) (0.47 (1.01) (0.02) (0.09)
Yen/Dollar Rate -1183,05 -356,17 -209,29 -1483,74 322,48

(1.01) (0.39) (0.16) (0.65) (0.46)
2
Adjusted R 0,01 0,01 0,08 0,07 0,02
Number of Obs. 188 184 188 188 188
Except for the dummies and the dependent variable, all variables are in log first differences
Table 12-B: Residuals Correlation
Sample: 07/02/97 - 05/18/98 LR Test: 415.56**

Korea 0,75
Malaysia 0,87 0,67
Thailand 0,62 0,80 0,49 0,90
33
C. Impact of Cross-border News
Tables 13 through 16 present the results of regressions with the complete set of
news dummies on the right hand side. These regressions were done to quantify the impact
of cross-border news on the markets. In addition to the news dummies of the Asia 5, we
also include good news and bad news dummies of Japan. This inclusion is interesting
given the strong trade linkage and financial ties Japan has with the countries in discussion.
Additionally, during the sample period, a large number of news events took place in Japan
that had far reaching implication for the regional markets. The U.S. stock market makes
up the last independent variable in this exercise.
The regressions yield interesting results. In addition to own country dummies
being significant, the bad news dummy from Indonesia is significant in the currency market
regressions of Thailand, Malaysia, Philippines, and Korea with the right signs. The
evidence reveals that even after controlling for fundamentals, the above markets were
significantly affected by bad news coming out of Indonesia. Thailand and Malaysia also
reacted favorably to good news coming out of Indonesia. Furthermore, good news from
Thailand led to favorable market reaction in Indonesia, and good news from Malaysia
helped the Thai baht. In the case of the Philippines, good news from Thailand and bad
news from Malaysia had a significant impact. Finally, both the good and bad news
dummies for Japan were significant in the Korea regression. The result reinforces our
earlier findings, and provide evidence of the immediate impact of Japanese news on the
Korean market.
The results from the stock markets are slightly weaker. Malaysia and Indonesia
reacted significantly to each other’s news, whereas good news originating from Japan
impacted the stock market in Indonesia. Good news about Thailand had a significant and
positive impact on the market of the Philippines. As seen in the earlier regressions, the
U.S. stock market had a significant impact on the regional stock markets.
The results from the interest rate and sovereign spreads regressions are again very
weak. The findings re-confirm our previous argument.11
11
As a logical extension of our work, we analyze the residual correlations of these cross-country dummy
regressions. It is difficult to ascertain the informational content of these residuals. Having controlled for
fundamentals, and news from other countries, we have accounted for all tangible sources of market factors with
daily frequency. The residuals of these regressions may contain unobserved movements of fundamentals, or
pure contagion effects, or both. Given the unclear implication of the results, we omit them from the paper. It
is worth noting that the exchange rate residual correlations diminish significantly relative to the correlations
of own-country dummy regression residuals, whereas the stock market residuals remain fairly strong.
34
We do not presume that the news dummies capture all the movements of the
fundamental for a given country. Nor do we claim that the news are purely exogenous
shocks. However, given the lack of variables with daily frequency, they are a valuable source
of information about a country’s fundamental changes.
Table 13. Regression results using across the board Dummy Variables
Dependent Variable: Thailand Korea Philippines Malaysia Indonesia

Change in Exchange Rate
Constant 0,001 -0,002 0,002 0,003 0,005
(0.57) (0.85) (1.02) (1.34) (0.94)
Bad News 0,022 0,004 -0,003 0,011 -0,013

(4.58)** (0.58) (0.64) (1.75)* (0.91)
Thailand Good News -0,017 -0,009 -0,016 -0,009 -0,031
(2.67)** (0.87) (2.43)** (1.13) (1.64)*
Bad News -0,005 0,041 0,001 -0,008 -0,006

(0.90) (4.87)** (0.25) (1.42) (0.43)
Korea Good News -0,006 -0,004 -0,007 -0,003 -0,009
(1.22) (0.61) (1.65)* (0.50) (0.68)
Bad News 0,028 0,003 0,041 -0,004 -0,017

(2.27)** (0.01) (3.32)** (0.20) (0.47)
Philippines Good News -0,009 -0,041 -0,004 -0,005 -0,069
(0.67) (1.42) (0.28) (0.20) (1.82)*
Bad News -0,001 -0,007 0,011 0,015 0,017

(0.24) (0.95) (2.16)** (2.98)** (1.27)
Malaysia Good News -0,008 0,011 0,0002 -0,017 -0,012
(2.34)** (1.02) (0.34) (2.33)** (0.65)
Bad News 0,008 0,012 0,008 0,006 0,042

(2.35)** (2.17)** (2.16)** (4.10)** (4.10)**
Indonesia Good News -0,012 -0,003 -0,007 -0,010 -0,046
(2.54)** (0.47) (1.51) (1.60) (3.45)**
Bad News 0,001 0,015 -0,003 -0,001 0,006

(0.15) (2.66)** (0.75) (0.19) (0.59)
Japan Good News -0,002 -0,021 -0,001 -0,002 0,014
(0.28) (2.55)** (0.08) (0.26) (0.78)
Change in US Stock Index -0,231 -0,285 0,023 -0,244 -0,62

(2.13)** (1.67)* (0.21) (1.90)* (1.98)**
2
Adjusted R 0,21 0,17 0,13 0,12 0,17
Number of Obs. 202 181 207 185 207
35

Change in Stock Market Index
Constant 0,002 -0,003 -0,001 -0,004 -0,005
(0.08) (0.91) (0.40) (1.43) (1.78)*
Bad News -0,025 -0,008 -0,008 -0,001 -0,005

(3.21)** (0.85) (1.10) (0.19) (0.63)
Thailand Good News 0,023 -0,006 0,022 -0,001 0,004
(2.36)** (0.48) (2.28)** (0.09) (0.31)
Bad News -0,009 -0,025 0,006 -0,011 -0,001

(1.18) (2.68)** (0.90) (1.35) (0.15)
Korea Good News 0,001 0,025 -0,003 0,002 0,006
(0.19) (2.93)** (0.42) (0.28) (0.85)
Bad News 0,014 0,054 -0,019 -0,014 -0,024

(0.74) (2.49)** (1.07) (0.73) (1.21)
Philippines Good News -0,022 0,008 -0,002 0,023 -0,031
(1.14) (0.23) (0.12) (0.76) (0.94)
Bad News -0,006 0,005 -0,017 -0,019 -0,005

(0.87) (0.01) (2.73)** (2.71)** (0.73)
Malaysia Good News 0,006 -0,014 0,010 0,051 0,029
(0.59) (1.23) (1.13) (5.35)** (2.78)**
Bad News -0,001 -0,006 -0,002 -0,010 -0,021

(0.60) (0.86) (0.34) (1.86)* (3.33)**
Indonesia Good News 0,004 0,004 -0,002 0,014 0,012
(0.53) (0.47) (0.31) (1.87)* (1.53)
Bad News -0,002 -0,001 -0,003 -0,001 0,005

(0.33) (0.08) (0.63) (0.09) (0.82)
Japan Good News 0,001 -0,006 0,004 0,007 0,019
(0.07) (0.62) (0.47) (0.79) (2.06)**
Change in US Stock Index 0,524 0,546 0,643 0,596 0,591

(3.17)** (2.72)** (4.16)** (3.54)** (3.27)**
2
Adjusted R 0,10 0,10 0,11 0,24 0,16
Number of Obs. 187 190 201 192 196
36

Interest Rates
Constant 17,25 16,950 18,82 8,32 33,72
(60.40)** (32.81)** (16.99)** (29.93)** (20.47)**
Bad News -1,340 -2,33 -2,94 -1,28 -4,48

(1.58) (1.51) (0.91) (1.59) (0.94)
Thailand Good News -2,18 -2,11 4,89 -1,32 4,31
(1.96)** (1.03) (1.13) (1.11) (0.66)
Bad News 0,47 2,83 -2,25 0,87 -4,35

(0.53) (1.73)* (0.67) (1.03) (0.87)
Korea Good News 1,58 4,73 -5,04 1,41 1,55
(1.99)** (3.35)** (1.58) (0.83*) (0.35)
Bad News 1,28 -1,49 5,27 9,61 -11,99

(0.62) (0.22) (0.64) (4.74)** (1.01)
Philippines Good News 0,606 0,75 0,66 1,57 5,41
(0.21) (0.12) (0.07) (0.48) (0.28)
Bad News 1,81 -0,16 -2,04 0,14 3,14

(2.32)** (0.11) (0.67) (0.19) (0.71)
Malaysia Good News 2,34 0,69 -5,64 -0,14 2,82
(2.11)** (0.36) (1.34) (0.13) (0.43)
Bad News 1,08 2,22 -3,14 1,21 2,37

(2.72)* (2.01)** (1.32) (2.04)** (0.68)
Indonesia Good News 1,27 5,21 -1,56 1,46 6,31
(1.64)* (3.62)** (0.51) (1.89)* (1.38)
Bad News -0,07 -0,24 0,88 -0,51 -2,97

(0.11) (0.21) (0.37) (0.85) (0.85)
Japan Good News 1,06 0,07 -4,72 -0,16 5,09
(1.07) (0.04) (1.24) (0.17) (0.91)
Change in US Stock Index 11,68 1,03 125,69 19,58 25,38

(0.63) (0.03) (1.72)* (1.08) (0.23)
2
Adjusted R 0,11 0,11 0,12 0,09 0,10
Number of Obs. 214 214 214 210 214
37

Sovereign Spreads
Constant 246,62 240,510 302,93 109,83 352,81
(23.25)** (18.76)** (48.14)** (13.39)** (16.83)
Bad News -32,580 -46,91 -33,58 -44,78 -70,59

(1.01) (1.28) (1.76)* (1.83*) (1.11)
Thailand Good News -61,29 -89,78 -51,72 -49,13 -99,54
(1.44) (1.75)* (2.05)** (1.41) (1.18)
Bad News 98,76 142,23 66,46 -1,9 19,47

(2.99)** (3.56)** (3.39)** (0.08) (0.31)
Korea Good News 107,22 110,83 59,68 51,45 162,05
(3.62)** (3.10)** (3.40)** (2.28)** (2.77)**
Bad News -26,73 32,03 -18,36 -82,99 -141,05

(0.33) (0.33) (0.68) (1.34) (0.88)
Philippines Good News -91,830 -110,33 -69,4 8,05 -119,17
(1.08) (1.07) (1.38) (0.12) (0.71)
Bad News -45,58 -28,28 -18,95 3,66 -22,24

(1.53) (0.78) (1.07) (0.16) (0.38)
Malaysia Good News 0,980 -5,68 5,94 17,14 43,24
(0.02) (0.11) (0.24) (0.54) (0.53)
Bad News 42,54 52,23 20,94 34,43 84,06

(1.82)* (1.85)* (1.51) (1.93)* (1.82)*
Indonesia Good News 82,22 95,27 49,44 89,06 251,67
(2.71)* (2.61)** (2.75)** (3.85)** (4.21)**
Bad News 7,15 -10,15 1,4 17,65 -51,65

(0.30) (0.36) (0.11) (0.98) (1.11)
Japan Good News 10,75 -15,19 3,75 26,35 -44,41
(0.29) (0.33) (0.17) (0.92) (0.60)
Change in US Stock Index -120,75 -410,12 77,71 223,24 -189,65

(0.17) (0.48) (0.19) (0.41) (0.14)
2
Adjusted R 0,11 0,11 0,12 0,09 0,10
Number of Obs. 214 214 214 210 214
38
VI. CONCLUSION
The results obtained in this paper suggest discernible patterns of contagion during
the East Asian crises. Comparing correlations in tranquil versus crisis periods, we present
evidence in favor of substantial contagion in the foreign debt markets, whereas the evidence
on stock market contagion is more tentative. In addition, using dummies constructed from
daily news, we showed that after controlling for own country news and a few other
fundamentals, the cross-country correlations in the currency and equity markets remain large
and significant.
The Asian crises suggest that during a period of financial market instability, market
participants tend to move together across a range of countries. Shocks originating from one
market readily get transmitted to other markets, thus becoming a source of substantial
instability. The evidence of contagion in the foreign debt markets reinforces the view that
there was an element of financial panic at the onset of the Asian crises.
Despite the inherent constraints associated with high frequency data, it is crucial to
develop methodologies to understand the short term movements in financial market
variables. The policy implications associated with movements associated with fundamentals
and contagion are quite different. In the first case, policy makers cannot expect the markets
to recover unless measures are taken to improve fundamentals. On the other hand, if it is
the case that markets are declining due to panic behavior, then credible policy actions to
soothe the market sentiments ought to be the priority. Correct differentiation between these
causes is a key to tackling financial market contagion.
39
APPENDIX 1
DATA AND METHODOLOGY
A. Data
The five countries included in this study were Thailand, Malaysia,

Indonesia, South Korea, and the Philippines. The countries were selected as they
stand out amongst the most affected ones during the Asian crises. The data set
comprises daily observations of bilateral nominal exchange rate (vis-à- vis US$),
end of day stock market indices, and overnight call rates that span from January
1, 1995 to May 18, 1998. We also use daily data to calculate spreads on dollar-
denominated debt for all five countries, but the sample is restricted from April 11,
1997 to May 19, 1998. For the spreads, we match the best available sovereign
issues with US Treasury yields of corresponding maturity and coupon. The source
of the data is Bloomberg.
B. Significance Tests
Following the work of Forbes and Rigobon (1998), we apply a two-

sample or heteroscedastic t-test for a significant increase in cross-country
correlations for this purpose.12 Using a likelihood ratio, it is a test of the null
hypothesis of the tranquil period correlation being greater or equal to the crisis
period correlation against the alternative hypothesis that correlation is greater
during the crisis phase:
H 0 : ρ i0, j ≥ ρ i1, j
H 1 : ρ i0, j < ρ i1, j
where ρti,j is the correlation coefficient between country >i= and country >j=
over period t. The tranquil period is denoted ‘0’ and the crisis period is
denoted >1=.
The correlation coefficients are transformed through a Fisher

transformation, so that they are approximately normally distributed with mean µt
and variance s2t:
12
See Ostle and Malone (1988).
40
1  1 + ρ i , j 
t
µ t = ln  and σ t2 = 1
2  1 − ρ it, j 
 nt − 3
The test statistic is derived through the following equation:
X − X
U = 0 1
1
 s
2
s  2 2
 0
+  1
n 
 0 n 1 
where and St2 are the estimated sample mean and variance following the Fisher
transformation.
The test statistic follows the t-distribution. The degrees of freedom is

calculated as follows:
(s 2
0 / n 0 + s 02 / n 0 )
2
( s 02 / n0 ) 2 ( s12 / n1 ) 2
+
n0 − 1 n1 − 1
Since we make use of extensive correlation analysis in the first part of the
paper, we apply a likelihood ratio test for the significance of groupwise correlations.
Following Valdés (1995), as well as Pindyck and Rottemberg (1990), the null
hypothesis is that there is no groupwsie correlation. The test statistic, -N log|R|, is
distributed as χ2 with (2)p(p-1) degrees of freedom. Here, >|R|= is the determinant of
the correlation matrix, >N= is number of observations in the common sample, and >p=
is the number of series being tested.
41
C. Calculating Sovereign Spreads
In order to calculate the sovereign bond spreads, we took into account two
characteristics: coupon rate and maturity date of the sovereign instruments. We then
obtained the closest approximation of these characteristics in U.S. treasury
instruments. Our first priority was to achieve the closest match with the maturity date,
as temporal differences have the greatest influence over price/yield calculations. The
table below provides details on the various issues chosen:
Sovereign Debt U.S. Treasury

Instruments
Country Issue Name Coupon Maturity Coupon Maturity
Indonesia INDON 7.750 Aug 2006 7.000 July 2006
Korea KDB 7.250 May 2006 6.875 May 2006

(Korea
Development
Bank)
Malaysia MYS 9.875 Sept 2000 8.750 Aug 2000
Philippines PHLBB 6.000 June 2008 6.250 Feb 2007

(Brady Bond)
Thailand THA 7.750 April 2007 6.250 Feb 2007
42
APPENDIX II
NEWS CHRONOLOGY
BAD NEWS
07-02: After several weeks of speculative attacks, The Bank of Thailand

announces a managed float of the baht and calls on the International Monetary
Fund for "technical assistance."
07-11: The Philippines central bank says in a statement it will allow the peso to
move in a wider range against the dollar
Indonesia widens its rupiah trading band to twelve from eight percent.
07-14: The Malaysian central bank abandons the defense of the ringitt.
07-23: Non-performing loans of the 13 Thailand commercial banks (excluding

the Bangkok Bank of Commerce and the Union Bank of Bangkok) average 8
percent of assets, ranging from 4 percent for Bangkok Bank to 10.5 percent for
Krung Thai Bank.
07-24: Malaysian Prime Minister Mahathir Mohamad launches bitter attack on

"rogue speculators."
07-25: In Japan, Former chairman of Dai-Ichi is indicted on charges that he made

loans totalling 11.78 billions yen to a suspected corporate racketeer
08-10: Payoff scandal in Japan widens as Yamaichi Securities, the nation’s third
largest financial company, forces its top board members to resign.
08-11: Contradictory statements about the appropriate level of the Ringitt made
by the Malaysian PM and bank officials.
08-14: Indonesian analysts raise grave concerns about unhedged dollar exposures
of domestic corporations. The central bank abolishes its system of managing the
exchange rate through the use of a band and allows it to float.
08-22: Thailand's $23.4 billion outstanding forward currency contracts surprises

most market analysts.
Daiwa Securities, the second largest brokerage company in Japan, says
that it is also being investigated in the payoff scandal.
08-24: Malaysian PM Mahathir Mohamad blames U.S. financier George Soros

for leading attack on East Asian currencies: "All these countries have spent 40
years trying to build up their economies and a moron like Soros comes along."
43
08-28: Leading international financial firms say that they will pull back substantially
from Thailand in response to new capital control measures imposed by the Ministry
of Finance.
09-04: Several multi-billion dollar projects delayed or canceled in Malaysia.
09-10: Bank Indonesia reduces one-month interest rates by 2 percentage points to

25 percent.
09-12: Moody's Investors Service analyst said that up to five unidentified banks may
fail in Thailand because of their problems.
Hokkaido Bank and Hokkaido Takyshoku Bank of Japan postpone their
planned merger until the huge bad loan problems of the respective banks are sorted
out.
09-16: Indonesia says it will postpone projects worth 39 trillion rupiah.
09-17: Standard & Poor's downgrades seven financial institutions in Thailand.

Five current and former employees of Yamaichi Securities Company are
arrested on illegal payoff charges in Japan. Yamaichi is also banned from under-
writing Government bonds.
09-24: Arrests and resignations of current and former officials of Daiwa and
Yamaichi Securities continue in Japan.
09-25: Indonesian Social Minister Inten Suweno says the death toll from famine and
a cholera outbreak in Indonesia's remote Irian Jaya province has risen to 271.
Office of Nikko Securities in are raided in connection with the payoff scandal
in Japan.
09-29: Thailand will raise value added tax (VAT) for most water and phone services.
10-01: Malaysia’s PM Mahathir repeats his call for tighter regulation, or a total ban,
on forex trading.
10-03: Nikko Securities chairman and six other officials resign over the payoff scandal
in Japan.
10-06: Bank of Japan releases survey indicating that bank managers have turned
more pessimistic. The survey results are worse than expected.
10-16: The Bank of Thailand revises downward its growth forecast for 1997 from
2.5 percent to 1 percent.
10-17: Malaysia presents a budget with provisions for sharp spending cuts.
44
10-20: The five biggest banks in Thailand report third-quarter profit declines ranging
from 13 percent at Siam Commercial Bank to 86 percent at Krung Thai Bank. Thai
Finance Minister, Thanong Bidaya, announces that he would resign.
10-22: The Indonesian central bank prepares a list of troubled banks that will be
liquidated as part of a bailout plan.
In Japan, LDP’s package to jump-start the economy falls short of
expectations
10-23: The Big 4 securities houses of Japan, Daiwa, Yamaichi, Nikko, and Nomura
Securities, report lower profits and falling commission for the first half of the 97-98
fiscal year.
10-27: The payoff scandal in Japan grows as Hitachi admits that ten of its employees
paid money to racketeers.
10-29: Thailand’s Prime Minister’s own party members and coalition partners
threaten rebellion if he does not make some changes to the cabinet by November 5.
The Ministry of Finance in Japan suspends Daiwa from bidding and
underwriting Govt. Bonds.
11-04: Indonesia’s President Suharto’s second son Bambamg Trihatmodjo, owner

of 25 percent of Bank Andromeda, promises to take legal action against the
government after his proposal to inject 350 billion rupiah into the bank is rejected.
11-06: Traders said the dollar rise versus the won reflected the U.S. currency's
strength versus the yen. 'The dollar's sharp rise against the Japanese yen in global trade
boosted the U.S. currency against the won in Korea,' said a dealer at SeoulBank. In
addition, dealers said sentiment about South Korea is negative, based on media
reports in the Western press stating that South Korea's economic crisis is set to get
worse.
11-07: In Indonesia; sources claim that the Minister of Finance has resigned as a
consequence of the legal action taken by Bank Andromeda.
11-11: The private sector in Thailand faces about $16 billion worth of maturing
foreign debts in the next 14 months, of which cash-strapped Thai corporate borrowers
would need to roll over at least an estimated $6.0 billion.
11-12: Analysts express concern about Japan’s banking sector difficulties to be

compounded in the face of its exposure to Asia, particularly Hong Kong.
11-17: South Korea abandons its defense of the battered won.
11-18: The Financial Reform Bill fails to pass in the National Assembly in Korea..
Malaysia’s infrastructure firm United Engineers (M) Bhd (UEM), one of a
handful of blue chips favored by foreign investors for predictable cash flows, says it
had bought a 32.6 percent stake in debt-laden affiliate Renong Bhd.
45
11-19: Japan’s prime minister denies that he is considering using public funds to help
ailing banks, raising fears of massive bankruptcy.
11-21: In Japan, Yamaichi Securities Co. said it is considering whether to close

down, with a final decision planned for Monday. The company, one of Japan's so-
called "Big Four" securities houses, is facing severe financial problems and pressure
from government regulators over newly discovered debts.
11-24: Troubled Tokyo brokerage Yamaichi Securities Co. Ltd., the fourth-largest in
Japan, announces that it is closing its doors.
11-25: Standard & Poor's ratings agency on Tuesday lowers South Korea's currency
ratings because of its growing financial crisis and warns that current events could
result in another downgrade in the next few months.
12-01: Devastated by bankruptcies and debt defaults, several Korean commercial and
merchant banks are on the brink of collapse. Korean and IMF officials continue to
disagree on the details of the aid package.
12:02: Director of Banking Supervision at Bank Indonesia, Budi Rohadi, is quoted

as saying the government could not rule out liquidating more banks in an effort to
improve the banking system. Standard & Poors places the Indonesian power producer
IPPs bonds and loans on credit watch. The credit watch placement reflects a potential
shift in government support of the electricity company.
12-03: Moody's Investors Service put another group of Japanese banks under review
for a possible downgrade.
12-08: Announcements are made of a Korean government takeover of a major bank

and a merger in the ailing auto industry (Daewoo and Ssangyong Motor Co. A U.S.
economist reiterates concerns that last week's record-breaking $57 billion bailout
package for Korea organized by the International Monetary Fund would not be
enough.
12-09: Rumors that Indonesia's President Suharto is gravely ill swept Southeast
Asia.
South Korea's foreign-exchange reserves have run dangerously low, with its
official reserves standing at $23.9 billion on Dec. 2, down from $30.5 billion at the
end of October.
12-11: Overnight, Moody's Investors Service lowered South Korea's foreign debt
currency ceiling and downgraded the ratings of 31 Korean issuers. Standard & Poor's
cuts ratings on three South Korean financial institutions.
The Rating Agency Malaysia Bhd (RAM) says that it has downgraded bond
issues guaranteed by Sanwa Bank and the Tokai Bank.
12-15: A possible freeze on Indonesian loan repayments raises concerns of a

deepening financial crisis.
46
The Philippines government challenges the markets by telling banks they
could keep their money if they were not willing to lower interest rates. "We do not
need that money if the rates are going to be so high," assistant finance secretary Gil
Beltran tells Reuters after the Bureau of Treasury rejected all bids at Monday's
auction. The rejection, which the Treasury last did two years ago, comes as a surprise
because the state's fiscal position is extremely shaky.
12-18: Voters in South Korea elect longtime dissident Kim Dae-jung, the most
critical candidate of the IMF bailout to serve a five-year term as president, leaving
analysts’s concerned that the country's financial markets will be further battered.
12-19: The failure of a foodstuffs trader, Toshoku Ltd. the fourth-largest bankruptcy
in post-war Japan, renews concerns about the precarious state of the Japanese
economy
12-22: Moody's says it has downgraded the foreign currency ceiling for bonds and
bank deposits of Indonesia, Malaysia and South Korea. It also downgrades
Thailand's foreign currency ceiling for bonds and confirmed the ceiling for bank
deposits.
12- 24 Some U.S. banks appear to be concerned about the ability of South Korean
companies to repay their loans in the wake of the country's ongoing financial crisis.
The outlook for Japan's financial sector worsened Wednesday as Standard
& Poor's cut its ratings on two of that country's major banks.
01-02: Standard & Poor's downgrades Indonesia’s sovereign ratings.
01-05: Thailand announces that it would ask the International Monetary Fund to ease
the terms of its $17.2 billion bailout package.
01-06: Indonesia announces its budget without a tough reform agenda and overly
optimistic projections.
01-07: Market reports that the IMF is dissatisfied with the Indonesian reform effort
raises fears that the second tranche of the IMF package would not be disbursed.
01-09: The Petroleum Authority of Thailand (PTT) is ordered to suspend

construction of its gas pipeline in forest areas.
01-15: Bank Indonesia, the central bank, announces that it would raise interest rates
on SBI (central bank) certificates across the entire spectrum of maturities, from
overnight to one-year.
01-21: Indonesian corporates are resorting to rupiah payments on U.S. dollar debt,
while renewed political jitters added another broadside.
47
Bankers in New York say overnight that efforts to restructure South Korea's
debt burden may have grown more difficult with the country expected to reject any
proposal to raise money through a large bond offering.
01-22: Indonesia's corporate debt is estimated at $65 billion.

Vehicles sales in Malaysia are expected to drop by 60 percent this year.
02-05: The Indonesian government has estimated that about 10 percent of its
workforce of 90 million people will be unemployed by the end of the year.
02-06: The Japanese government declares the economy "stagnant" in a monthly

report that offers the darkest assessment of the country's business climate in more than
20 years.
02-10: Korean unions voice opposition to job losses and threaten possible strikes
02-11: Riots break out to protest rising food prices in Indonesia. President Suharto
warns that unknown "parties" are seeking to undermine the economy.
02-12: IMF gives cool reception to Indonesia’s currency board ideas.
02-20: Indonesian and US officials contradict each-other on the implementation of

the currency board system.
02-23: Rating Agency Malaysia (RAM) says on Monday it has downgraded

Damansara Realty Bhd's 300 million ringitt convertible redeemable guaranteed
unsecured loan stocks to B1 from BBB3.
The G7 singles out Japan for criticism after a weekend meeting. "In Japan,
activity is low and the outlook is weak," a statement released after the meeting read.
02-25: New Korean premier sworn in, but opposition obstructs approval vote.
03-02: New inflation figures suggest possibility of hyperinflation in Indonesia, as

year-to-year rate hits 32 percent.
03-04: Malaysia's central bank says the blue chip Sime Dalby Bhd's banking unit -one
of the country's top 10 banks - needs over a billion ringitt in fresh capital. It also says
that the country's second largest bank, government-run Bank Bumiputra Malaysia
Bhd, and two finance companies also may need capital injections.
Central bank officials revealed that the Thailand Financial Institutions
Development Fund had liabilities of 1.1 trillion baht as of mid-February, compared
with just 36.2 billion baht in mid-1995.
03-05: Currency board confusion continues as Indonesian authorities say that it was
still part of the reform plan. Also an IMF review is delayed as reports say very little
progress has been done on reforms.
48
03-11: Prosecutors raid the Bank of Japan (BOJ) and arrest one of its top officials.
03-12: Concerns are raised over the recapitalization requirements of some Thailand
companies, following news that fixed line communications company Telecom Asia Plc
would raise its registered capital through an issue of 777 million new shares, without
announcing terms as yet.
03-14: Indonesia’s President Suharto announces cabinet replete with cronies and
relatives.
03-20: In Japan, a huge derivatives trading loss is reported at health food maker
Yakult Honsha Co. Ltd.
03-27: The long awaited economic-stimulus package is announced in Japan, and it

does not include tax cuts to bolster economic growth.
03-30: Food riots spread through Indonesia.
03-31 South Korea's February industrial output showed negative annual growth for
the second month in a row while February output was down 1.9 percent on a year
earlier. All indicators points to recession.
04-02: Moody's ratings on RHB Bank Bhd, essentially reflect the rating agency's
overly pessimistic views on the Malaysian economy and banking sector.
Indonesia reports a trade surplus of $1.78 billion in January against
$1.53 billion in December. But the rising surplus stemmed not from rising exports -
which actually fell to $4.15 billion from December's $4.70 billion - but from collapsing
import.
The release of a Bank of Japan survey indicates that corporate confidence in
the Japanese economy had sunk to a dramatic low.
04-03: Moody's Investors Service lowers its outlook on Japan's sovereign debt
rating.
04-10: The much anticipated speech by Prime Minister Hashimoto on the economy
of Japan falls short of expected reform announcements.
04-15: A decline in industrial production in February and a rise in inflation to a

five-year high in March show the Malaysian economy could slow down faster than
expected.
04-14: Indonesia's much-heralded economic reforms programme suffers a set back

after newspapers quote a senior cabinet minister as saying one of the measures agreed
with the IMF may not be implemented. "This is the Republic of Indonesia here, this
is not the IMF republic," Republika newspaper quoted Trade and Industry Minister
Mohamad "Bob" Hasan as saying.
04-16: More news of corporate difficulties surface in Malaysia.
49
04-16: Kia Motors’ workers in Korea begin a strike.
05-04: Indonesian authorities announce gas and utilities fee hikes.
05-06/07: Student protest and looting in cities continues in Indonesia.
05-13: In Indonesia, news is released about 6 students being killed in a protest rally
the day before.
GOOD NEWS
07-17: The inflation outlook is stable for the Philippines.
07-29: In an uncharacteristically decisive move, Japan’s Ministry of Finance

announces punishment of unprecedented severity for Nomura Securities and Dai-Ichi
Kangyo Bank for illegal payments.
07-28: Thailand seeks IMF for a rescue package.
08-05: Thailand unveils an austerity plan and complete revamp of finance sector as
part of IMF suggested policies for a rescue package.
08-20: IMF approves a $3.9 billion credit for Thailand.
08-27: The Central Bank of Japan announces that it will keep interest rates down to
facilitate economic recovery.
09-05: Malaysia’s PM Mahathir's announces infrastructure spending will be slowed

and that the recently imposed ban on short sales of shares would be lifted as of today.
09-08: Malaysia's central bank said on Monday that banking groups with at least two
Tier-1 banks would be allowed to freely combine and rationalize their internal
operations to improve efficiency.
09-19: Koko Sato, Japanese politician once convicted in bribery scandal, but recently
appointed to cabinet, suggests he will resign, thus defusing a political crisis for the
Prime Minister.
10-02: Thailand’s newly published inflation reports say pressure not too high.
10-08: Indonesia says it will ask the IMF for financial assistance.
10-09: Thailand’s PM Chavalit Yongchaiyudh is told by Japanese PM Ryutaro

Hashimoto that Japan will extend $8 billion to Thailand as part of a trade and
investment insurance scheme.
50
10-31: The IMF announces a $23 billion multilateral financial package involving the
World Bank and Asian Development Bank to help Indonesia stabilize its financial
system.
11-11: South Korea's Ministry of Finance and Economy announces that it plans to
put forth all efforts to stabilize the country's currency against the U.S. dollar by
resolving concerns about financial market turmoil. Local newspapers, meanwhile,
report that the government will soon announce a package of measures, which includes
widening overseas borrowing by state-run corporations and a restructuring in
merchant banks.
11-14: South Korea's majority party vows to pass a reform package it says will clean
up debt-ridden banks. The proposed reform - the first of its kind in half a century -
calls for a major shakeup of the nation's banking industry to encourage foreign
investors to return to South Korea.
11-17: The failure of the Hokkaido Takushoku Bank, the first of Japan’s big banks
to collapse under the weight of bad loans, is the latest - and strongest - sign yet that
the Japanese government is prepared to allow market forces to reconfigure the
domestic financial landscape.
11-21: South Korea said it would seek a rescue package from the International
Monetary Fund.
11-24: Malaysia's solid export growth of 21.7 percent in September raises hopes that
it will cushion the economic slowdown.
11-27: The Bank of Japan and the Finance Ministry makes a rare statement of
assurance to calm investors. Finance Minister Hiroshi Mitsuzuka states that no more
financial failures are imminent after the Yamaichi failure.
12-04: IMF Managing Director Michel Camdessus signs a letter of intent on

Wednesday covering an international accord to provide Korea with $57 billion to help
dig it out of its financial mess.
12-08: Deputy Prime Minister and Finance Minister Anwar Ibrahim set the new
economic agenda Friday, announcing Malaysia's most sweeping policy changes in a
decade. Among other things, he pledges to slash government spending by 18 percent,
curb big-ticket imports and restrict bank credits and stock-market fund raising.
12-09: News is released that the Japanese government will issue 10 trillion yen in
new bonds to support the financial system.
12-16: Following IMF guidelines, the Korean authorities announce to sell off two
troubled banks and push forward with a $10 billion sovereign bond issue.
51
12-17: Prime Minister Ryutaro Hashimoto of Japan announces a special two trillion
yen ($15.7 billion) cut in personal income taxes.
12-30: A group of key U.S. and German banks agrees to help Korea manage its
estimated $100 billion in short-term debt. The International Monetary Fund approves
a $2 billion payment for troubled South Korea Tuesday, bringing IMF payments to
more than $11 billion in just under a month.
01-09: Expectations of some type of Indonesian debt accord intensifies following

telephone conversations between U.S. President Bill Clinton and Asian leaders, and
a new commitment from Indonesian President Suharto to implement economic
reforms.
A proposal for the South Korean government to issue about $25 billion in
bonds to stem the country's debt crisis wins increased support at a meeting of
international banks.
01-13: The IMF and Indonesia neared an agreement over the IMF bailout. US
Deputy Treasury Secretary Lawrence Summers leaves his meeting with Suharto by
saying that Indonesia will implement its economic reform program "as soon as
possible."
01-15: Indonesia’s Suharto signs an agreement, second in 4 months, with the IMF
that requires him to dismantle the monopolies, and the family-owned businesses
International banks agreed to roll-over much of Korea’s short-term debt due
by the end of March.
01-16: Prime Minister Ryutaro Hashimoto of Japan hints during a meeting of his
ruling Liberal Democratic Party that the party may consider another round of tax cuts
01-26: Indonesia's government and the country's indebted companies hold talks with
foreign bankers to resolve a huge corporate debt problem through a probable debt
moratorium. A debt freeze proposal is also forwarded.
01-28: South Korea's government and global creditors agree to exchange about
$24 billion of the Asian nation's short-term debt for government-guaranteed loans.
02-02: Bank of Thailand announces lifting of capital controls imposed last May to
defend the baht.
02-06: The International Finance Corporation and other banks agrees to provide
$42 billion in credit for 42 domestic companies in Indonesia. Also, the government
pledges to move quickly to set up a bankruptcy law in line with the International
Monetary fund's requirements.
02-09: Finance Ministry announced that it would complete the liberalization of South
Korea’s financial markets to overseas investors.
52
02-10: Group of Seven is considers establishing a $16 billion fund to help stabilize
regional currencies. President Suharto of Indonesia stresses currency stabilization
measures.
Relaxing a key condition, IMF says that it will allow Thailand to return a
budget deficit of one to two percent of GDP in the year. In addition, the IMF will also
allow Thailand to ease its high domestic interest rates.
Philippines President Fidel Ramos on signs an amended oil deregulation law
to meet the last condition for the country's exit from International Monetary Fund
tutelage.
02-13 Union strikes in Korea are canceled.
02-17: The IMF releases a further $2 billion to South Korea, bringing total IMF
lending to about $15 billion so far out of its $21 billion Seoul rescue package.
Malaysia's central bank on reassures banks and finance companies that they
do not face a hard-and-fast March 31 deadline to complete mandated mergers.
02-19: Malaysia's Deputy Prime Minister Anwar Ibrahim says that there is no reason
yet to revise downward the government's four percent economic growth forecast for
the current year.
02-26: Officials express optimism about the ability to deal with Indonesia's $73
billion in private offshore borrowing.
Prime Minister Ryutaro Hashimoto said the Japanese government will
consider the possibility of bringing forward planned public works spending once the
budget for next fiscal year is passed by parliament.
02-27: The Korean opposition agrees to return to parliament, after three days of
boycott.
Malaysia raises the ceiling on foreign share ownership in telecommunications
companies to 49 percent from 30 percent.
03-02: A $3.29 billion trade surplus is reported for Korea in February, compared with
a $2.12 billion deficit a year ago.
03-10: In Indonesia, Suharto is reelected for a 7th term.
03-12: Korea’s President Kim Dae-jung calls for a lifting of barriers on hostile
mergers and acquisitions by foreigners.
03-13: Korea's international creditors had roll over $21.3 billion of short-term debts.
The US compliments Thailand’s PM on taking the right reform measures in
tackling the crises.
Top financial and political leaders gather to convince Suharto to follow the
IMF accord for Indonesia.
53
03-16: Korea’s debt rollover by foreign creditors are done over longer period than
the shortest possible 1 year, thus signifying confidence in the economic future.
03-20: Indonesia shelves currency board plans.
03-23: Hubert Neiss of IMF says “The IMF and the Indonesian government have
made 'considerable progress' toward a new deal to counter the country's grave
economic crisis.”
03-25: The secretary-general of the ruling Liberal Democratic Party of Japan, Koichi
Kato, hints at delaying legally mandated fiscal reforms, a move that would allow
Tokyo to introduce bold economic steps in the future, including large tax cuts.
04-06: Standard & Poor's, in a statement issued in London, says the latest bank
restructuring move in Indonesia is a "significant step" in the long-awaited
consolidation of the banking industry.
04-08: Indonesia says that it has reached agreement with the IMF on a new package
of economic reforms and targets, which the IMF would watch closely to ensure
compliance
04-09: For Korea, a successful $4 billion overseas bond sale takes place.
04-20: Various reform measures under IMF auspices begins in Indonesia.
04-23: Malaysia's Finance Minister Anwar Ibrahim gives a thumbs up to the

resolution of a drawn-out banking merger between RHB Bank Bhd and Sime Bank
Bhd
05-15: The Kuala Lumpur Stock Exchange reports that 50 out of Malaysia's
62 stockbroking firms exceed the bourse's minimum liquid funds requirement.
54
BIBLIOGRAPHY
Agénor, Pierre-Richard, and Joshua Aizenman (1997), “Contagion and Volatility with
Imperfect Credit Markets,” NBER Working Paper No. 6080, National Bureau of
Economic Research, July.
Baig, Taimur (1998), “Credit Booms and Financial Fragility in Emerging Markets: The Role
of Capital Inflow,” Mimeograph, University of Illinois at Urbana-Champaign.
Calvo, Guillermo (1996), “Capital Inflows and Macroeconomic Management: Tequila

Lessons,” International Journal of Finance and Economics, Vol. 1, July.
Chinn, Menzie (1997), “Before the Fall: Were East Asian Currencies Overvalued?’ NBER
Working Paper No. 6491 (Cambridge, Massachusetts: MIT Press).
Eichengreen, Barry, Andrew Rose and Charles Wyplosz (1996), “Contagious Currency
Crises,” CEPR Discussion Paper No. 1453, Center for Economic Policy Research,
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Forbes, Kristin and Roberto Rigobon (1998), “Measuring Stock Market Contagion:
Conceptual Issues and Empirical Tests,” Mimeograph, Massachusetts Institute of
Technology, April.
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and News on Capital Markets: Crisis Management in Argentina During the Tequila
Effect,” Mimeograph, The World Bank, February.
Glick, Reuven and Andrew Rose (1998), “Contagion and Trade: Why are Currency Crises
Regional?” Mimeograph, University of California at Berkeley, May.
Kaminsky, Graciela and Sergio Schmukler (1998), “What Triggers Market Jitters? A
Chronicle of Asian Crisis,” Mimeograph, The World Bank.
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International Monetary Fund.
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DEPARTAMENTO DE ECONOMIA

TEXTO PARA DISCUSSÃO

FINANCIAL MARKET CONTAGION IN THE ASIAN CRISIS1

JEL Classification Numbers: F30, F40, G15

Keywords: Contagion; Asian Crises; Financial Markets

Author’s E-Mail Address: baig@uiuc.edu, igoldfajn@imf.org

Then, we test if the correlations in the various markets increase significantly

Finally, we distinguish between the impact of fundamentals and possible herd

These dummies serve a dual purpose: they are proxies of own-country

The rest of the paper is organized as follows. Section II addresses some

II. CONCEPTUAL DISCUSSION OF CONTAGION

Thailand Malaysia Philippines Indonesia Korea US Japan

Thailand 4,6 1,2 2,0 1,8 19,8 15,0

Malaysia 3,7 1,3 1,5 3,2 18,3 12,4

Philippines 2,4 3,0 0,4 1,8 34,7 16,1

Indonesia 1,7 2,4 1,4 7,1 16,3 24,7

Korea 2,0 3,1 1,6 2,9 16,6 10,6

In addition to external shocks and spillovers, there exists a strand of explanation

III. FINANCIAL MARKET CORRELATIONS (EVIDENCE AND TESTS)

A. Currency Market Correlations

We begin our analysis by estimating correlation coefficients of the daily change in

LR test attempts to reject the null (7/1/1997 to 5/18/1998) LR Test: 37.38**

(7/1/1997 to 9/30/1997) LR Test: 5.11 (8/1/1997 to 10/31/1997) LR Test: 5.79

(9/1/1997 to 11/30/1997) LR Test: 11.66 (10/1/1997 to 12/31/1997) LR Test: 18.08*

(11/1/1997 to 1/31/1998) LR Test: 16.81* (12/1/1997 to 02/28/1998) LR Test: 25.08**

(1/1/1998 to 3/31/1998) LR Test: 26.03** (2/1/1998 to 4/30/1998) LR Test: 26.34**

LR test attempts to reject the null (7/1/1997 to 5/18/1998) LR Test: 60.53**

(7/1/1997 to 9/30/1997) LR Test: 13.37 (8/1/1997 to 10/31/1997) LR Test: 27.17**

(9/1/1997 to 11/30/1997) LR Test: 23.85** (10/1/1997 to 12/31/1997) LR Test: 21.80**

(11/1/1997 to 1/31/1998) LR Test: 27.56** (12/1/1997 to 02/28/1998) LR Test: 29.63**

(1/1/1998 to 3/31/1998) LR Test: 36.14** (2/1/1998 to 4/30/1998) LR Test: 17.23**

B. Stock Market Correlations

C. Interest Rate Correlations

D. Sovereign Spread Correlations

A superior alternative to domestic interest rates in investigating the market

LR test attempts to reject the null (7/1/1997 to 5/19/1998) LR Test: 538.95**

(7/1/1997 to 9/30/1997) LR Test: 166.13** (8/1/1997 to 10/31/1997) LR Test: 211.44**

(9/1/1997 to 11/30/1997) LR Test: 236.46** (10/1/1997 to 12/31/1997) LR Test: 136.56**

(11/1/1997 to 1/29/1998) LR Test: 78.29** (12/1/1997 to 02/28/1998) LR Test: 58.86**

(1/1/1998 to 3/31/1998) LR Test: 80.30** (2/1/1998 to 4/30/1998) LR Test: 31.80**

Sample: 07/02/1997 - 05/18/1997 Sample: 07/02/1997 - 05/18/1997

Response of Indonesia Response of Malaysia Response of Indonesia Response of Malaysia

-0.005 -0.002 -0.005

Response of Philippines Response of Korea Response of Philippines Response of Korea

-0.004 -0.006 -0.002 -0.002

Sample: 07/14/1997 - 05/18/1997 Sample: 07/14/1997 - 05/18/1997

Response of Thailand Response of Indonesia Response of Thailand Response of Indonesia

Response of Philippines Response of Korea Response of Philippines Response of Korea

-0.002 -0.004 -0.004 -0.005

Sample: 08/14/1997 - 05/18/1997 Sample: 08/14/1997 - 05/18/1997

Response of Thailand Response of Malaysia Response of Thailand Response of Malaysia

Response of Philippines Response of Korea

0.006 0.004 0.015

0.000 -0.002 0.005

-0.006 -0.008 -0.005

Sample: 11/06/1997 - 05/18/1997 Sample: 11/06/1997 - 05/18/1997

Response of Thailand Response of Indonesia Response of Thailand Response of Indonesia

-0.006 -0.02 -0.004 -0.010

Response of Philippines Response of Malaysia Response of Philippines Response of Malaysia

(1/1/1998 to 3/31/1998) LR Test: 26.03 (2/1/1998 to 4/30/1998) LR Test: 26.34

(9/1/1997 to 11/30/1997) LR Test: 23.85 (10/1/1997 to 12/31/1997) LR Test: 21.80

(11/1/1997 to 1/31/1998) LR Test: 27.56 (12/1/1997 to 02/28/1998) LR Test: 29.63

(1/1/1998 to 3/31/1998) LR Test: 36.14 (2/1/1998 to 4/30/1998) LR Test: 17.23

(7/1/1997 to 9/30/1997) LR Test: 166.13 (8/1/1997 to 10/31/1997) LR Test: 211.44

(9/1/1997 to 11/30/1997) LR Test: 236.46 (10/1/1997 to 12/31/1997) LR Test: 136.56

(11/1/1997 to 1/29/1998) LR Test: 78.29 (12/1/1997 to 02/28/1998) LR Test: 58.86

(1/1/1998 to 3/31/1998) LR Test: 80.30 (2/1/1998 to 4/30/1998) LR Test: 31.80

* , and * denote rejection at a 10%, 5% , and 1% levels respectively.