*5.1. Dynamic Conditional Correlations*

We now use the dynamic conditional correlation (DCC) multivariate GARCH models presented in the previous section to test whether the contagion occurred among the region's markets during the two periods of international financial crises: the Mexican "Tequila" crisis of 1994 and the Asian "flu" crisis of 1997. Contagion from the American stock market toward emerging stock markets (consisting of Asian and Latin American markets) is also tested in the period of the US subprime crisis of 2007. One advantage of DCC GARCH models is that we can estimate the pair-wise dynamic conditional correlations for all investigated markets in a single system. In this paper, we apply three DCC-GARCH(1,1) models for three crises in order to estimate DCC for each pair of the source and target countries. The Tables 5–7 report the estimates of the returns and conditional variances equations. The AR(1) terms in mean equation are significant except for Singapore, Taiwan (during the Mexican crisis); Singapore, Taiwan and Thailand (during the Asian crisis); and Indonesia, Taiwan, Thailand, Colombia, Mexico (during US subprime crisis). The coefficient of US returns in mean equations are highly significant, which confirms the impact of the American stock market on emerging stock markets. We just do not find significant coefficients of US returns for Colombia and Mexico during the Mexican crisis. The coefficients of lagged variances and shock-square terms are all significant at 1%, which means that the volatilities of these markets are time-varying. Hence, it supports completely the GARCH(1,1) models. The estimated parameters *θ*1 and *θ*2 of DCC processes are all significant at 1%. The conditions that *θ*1 + *θ*2 < 1 are all satisfaites.

The computed dynamic conditional correlations during the three crises are presented in Figures 1–4. The vertical continuous lines represent the break dates: 19 December 1994 for the Mexican "Tequila" crisis, 2 July 1998 for the Asian "flu" crisis (if crisis-initiating market is Thailand), 17 October 1998 (if Hong Kong) and 1 August 2007 for the US subprime crisis.

For the Mexican crisis, as shown in Figure 1, what we can observe clearly is that the Latin American stock markets exhibit higher correlations with Mexico compared to Asian stock markets. However, we cannot state increases in the correlation between crisis-originating market and target markets except for Argentina and Chile.

During the Asian crisis (Figures 2 and 3), the correlations between the market originating crisis (Thailand or Hong Kong) and Asian emerging stock markets are higher compared to their correlations with Latin American emerging stock markets. Indeed, the correlations of Latin American emerging stock markets do not exceed 35% while those of Asian emerging stock markets are sometimes more than 50%. However, the DCCs of the markets of these two regions with Thailand or Hong Kong share one common characteristic: the correlations become more volatile after the crisis. There are obviously increases in these correlations beyond the break points in most cases.

The Figure 4 shows the DCCs of all emerging stock markets under investigation with the US stock market during the US subprime crisis occurred in 2007. In the early stage of the US subprime crisis, the DCCs fluctuate lightly. Then they peak around the final quarter of 2008. At that time, their values are very high, especially those with Latin American emerging stock markets. Except for Venezuela, which is less than 10%, the DCC reach at 80% for Mexico, 70% for Chile, 50% for Argentina while the highest correlation between the US stock markets and the Asian emerging stock markets is about 50% for Hong Kong. This period corresponds to the Lehman Brothers' collapse6. Hence, the bankruptcy of Lehman Brothers seems to have the big impact on the contagion of the US subprime crisis toward the Asian and Latin American emerging stock markets. An increase in the volatility of DCCs after the crisis is also observed.

<sup>6</sup> Lehman Brothers is the fourth largest U.S. Investment Bank, which filed for bankruptcy on 15 September 2008.


**Table 5.** Estimation of DCC-GARCH model for the Mexican "Tequila" crisis.

*θ*1 = 0.0091 \*\*\* *(2.5764)* ; *θ*2 = 0.8750 \*\*\* *(9.7801)*. Note: Italic numbers in parentheses are t-statistics. \*, \*\*, \*\*\* represent statistical significance at the 1%, 5%, 10% *(p value)* of parameters.

**Table 6.** Estimation of DCC-GARCH model for the Asian "flu" crisis.




**Table 6.** *Cont.*

*θ*1 = 0.0100 \*\*\* *(5.1374)* ; *θ*2 = 0.9204 \*\*\* *(52.0098)*. Note: Italic numbers in parentheses are t-statistics. \*, \*\*, \*\*\* represent statistical significance at the 1%, 5%, 10% *(p value)* of parameters.






*θ*1 = 0.0086 \*\*\* *(4.3979)* ; *θ*2 = 0.9211 \*\*\* *(34.2800)*. Note: Italic numbers in parentheses are t-statistics. \*, \*\*, \*\*\* represent statistical significance at the 1%, 5%, 10% *(p value)* of parameters.
