THE IMPACT OF FINANCIAL CONTAGION ON EMERGING ASIAN STOCK MARKETS WITH SPECIAL REFERENCE TO GLOBAL FINANCIAL CRISIS

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1 Journal of Management (JOM) Volume 5, Issue 4, July August 2018, pp , Article ID: JOM_05_04_021 Available online at Journal Impact Factor (2016): (Calculated by GISI) ISSN Print: and ISSN Online: IAEME Publication THE IMPACT OF FINANCIAL CONTAGION ON EMERGING ASIAN STOCK MARKETS WITH SPECIAL REFERENCE TO GLOBAL FINANCIAL CRISIS M. Deivanai Department of Commerce and Financial Studies, Bharathidasan University, Tiruchirapalli, Tamilnadu, India Dr. S. Vanitha Department of Commerce and Financial Studies, Bharathidasan University, Tiruchirapalli, Tamilnadu, India ABSTRACT This paper investigates the transmission of financial contagion effect from the US economy to nine emerging Asian stock markets during the Global financial crisis in This event affected the global financial investments, financial functions and also slows down the economic growth and development. The financial systems of the selected countries were lead to volatility condition in their stock market. The daily return of the indices of the stock market which are the representation of the activities of the stock market are taken to identify the financial contagion effect of Global Financial Crisis for a period of five years before and nine years after the crisis. The study has selected the sample countries based on the availability of data from the MSCI report of emerging markets index of March 2018.This study employs statistical tools like Descriptive Statistics, ADF and GARCH(1,1) model to identify the contagion effect or impact. The extent of existence of contagion is analysed by comparing the pre crisis, crisis and post crisis period. Key words: Contagion, Daily Stock Return, Market Disturbances, Stock Market, Volatility. Cite this Article: M. Deivanai and Dr. S. Vanitha, The Impact of Financial Contagion on Emerging Asian Stock Markets with Special Reference to Global Financial Crisis, Journal of Management, 5(4), 2018, pp INTRODUCTION There was an extreme stress in the economies during the period of Global Financial Crisis which reflected on the financial systems and Stock markets. An expectation on the future editor@iaeme.com

2 The Impact of Financial Contagion on Emerging Asian Stock Markets with Special Reference to Global Financial Crisis increase in the house price within a short period of time influenced the subprime borrowers in the United States to daftly borrow to purchase and build houses. As a result banks incurred losses when the borrowers fail to repay their loans which lead to fall in housing prices. Many foreign banks have invested during the US housing market boom. These interconnections created a spill over to other countries. The failure of the Lehman Brothers in September 2008 caused a high degree of financial stress. This lead to the withdrawal of investment by the investors. This effect reflected on the economies and financial system across the globe. The objective of the research is to identify the effect of contagion on the nine emerging markets of Asia due to the Global Financial Crisis Therefore the index of the United States is considered as the independent variable and the indices of the nine emerging markets of Asia are considered as Dependent variable. To achieve the objective, GARCH (1, 1) model is used for identifying the contagion. 2. REVIEW OF LITERATURE In the article entitled The Global Stock Exchange and its Influence Towards the Indonesia Stock Exchange After the Global Financial Crisis in 2008 (2015) by IbnuKhajar examines the influence of Global Stock Market to the Indonesia Capital Market and the performance of the Global Stock Exchange after the 2008 Global Financial Crisis. The sample indices included in the study are DJI, NIKKEI, FTSE, KOSPI, ASX, HSI and STI towards IHSG for a period of September 2009 to June 2011 The results suggest that there is significant influence of the sample of the global stock market exchanges towards the Indonesia Stock Exchange except DJI, FTSE and HSI partly influence IHSG. [1]. The article entitled Global Financial Crisis and Emerging Stock Market Contagion: A Multivariate FIAPARCH-DCC Approach (2013) by Dimitrios Dimitriou, Dimitris Kenourgios and Theodore Simos has investigated the contagion effect of the Global Financial Crisis in a Multivariate Fractionally Integrated Asymmetric Power ARCH Dynamic Conditional Correlation framework for the period 1997 to 2012 on the equity markets of Brazil, Russia, India, China, South Africa(BRICS) and USA during the different phases of crises. The results support that there is no effect of contagion for most of the BRIC countries during the early stages of crisis and the correlation among all BRIC and US increased from early 2009 onwards after the collapse of the Lehman Brothers.[2]. Irfan Akbar Kazi, Khaled Guesmi and OlfaKaabia in his study Contagion Effect of Global Financial Crisis on OECD Stock Markets (2011) has applied Dynamic Conditional Correlation GARCH Model Engle to daily stock price data of US and sixteen OECD countries for the study period 2002 to 2009 and used Bai Perron structural break test to identify the break point due to the crisis. The objective of the study is to identify the contagion effect between the stock markets of US and sixteen OECD countries due to Global Financial Crisis. The result of the study shows that significant increase in the mean of Dynamic Conditional Correlation coefficient between US and OECD stock markets during the crisis period for most of the countries which proves the existence of contagion between US and sixteen OECD countries.[3]. The study titled Stock Market Interdependence, Contagion, and the US Financial Crisis: The Case of Emerging and Frontier Markets (2011) by Lalith P.Samarakoon has developed a framework to estimate the impact of shocks during normal times and during crisis times on 22 emerging and 40 frontier markets. The unexpected return are calculated by using auto regressive model and the US return shocks are related to return shocks in another model using VAR framework. Two separate shock models of partially overlapping and non overlapping editor@iaeme.com

3 M. Deivanai and Dr. S. Vanitha are developed to measure the interdependence and contagion. The result of the article shows that frontier markets exhibit interdependence and contagion to US shocks. Except for Latin America there is no contagion from US to emerging markets. But there is contagion from emerging markets to US.[4]. RiadhAloui, Mohamed Safouane Ben Aissa and Duc Khuong Nguyen on Global Financial Crisis, Extreme Interdependence and Contagion Effect: The role of Economic Structure (2011) investigated the extreme co movement to examine the extent of the contagion effect on the Global Financial Crisis. The multivariate Copula approach is used to identify the dynamic patterns of flat tails and linear and non linear interdependence used to model the degree of cross market linkage. Daily returns of Brazil, Russia, India, China and US for the period of 2004 to 2009 are used in the study. The result of the study suggest that Brazil and Russia countries which are highly dependent on commodity prices are highly dependent on US than the countries India and China which are highly influenced by finished products export price level.[5]. Niklas Ahlgren, Jan Anteli in their study Stock Market Linkages and Financial Contagion (2010) has tested contagion by appliedco breaking model on developed as well as emerging markets. In the study the month end observations of Morgan Stanley Capital International(MSCI) total return indices denominated in USD for a period of January 1980 to August 2006 were used for developed markets namely German, Japan, UK and US and a period of January 1988 to August 2006 for emerging markets namely Hong Kong, Korea, Mexico and US were used. The study supports that, the evidence of co breaking in emerging stock markets is mainly due to the non financial event of the World Trade Center Terrorist attack in There is short term linkage during the times of crisis but not contagion. [6]. 3. DESIGN OF THE STUDY 3.1. Statement of the Problem The stock market plays an important role in the growth of the economy, commerce and industry. Stock market indices reflect the performance of the nation. In present scenario stock market is connected globally. Generally financial recessions affect the financial system and stock market of any country. Global Financial Crisis is considered as the most severe crisis around the world. As the tremor and shocks of the crisis was very high, it created a greater impact in the economies of the world. The collapse of one market ultimately leads to the collapse of the other which in turn led to spread of contagion. A shock in the financial markets leads to the decrease in the price of the assets which increases the risk of investing and leads the investors to withdraw. This creates a financial crunch in the economy Need of the Study Studies on the transmission of shock and the effect of contagion on the daily returns of the stock market is essential in finance as they play a vital role in the economy of the nation. Many studies have been conducted using different methodology to examine the existence of contagion effect of various crises on different stock markets in the world. It is identified that no studies have been conducted to identify impact of the financial contagion effect on the emerging markets of Asia in the recent period. Therefore the objective of the study is to recognise the extent of impact of the effect of financial contagion due to the Global Financial crisis on the emerging Asian markets. Many stake holders like individual investors, institutional investors, policy makers, academicians, etc can know the influence of the Global Financial Crisis on the emerging markets of Asia through this study editor@iaeme.com

4 The Impact of Financial Contagion on Emerging Asian Stock Markets with Special Reference to Global Financial Crisis 3.3. Objectives The following are the objectives of the study. To test the normality of the stock returns of United States and the emerging markets of Asia during the pre crisis, crisis and post crisis periods. To test the stationary of the stock returns of United States and the emerging markets of Asia during the pre crisis, crisis and post crisis periods. To test the existence of effect of financial contagion during the Global Financial crisis on the emerging markets of Asia Hypothesis The hypotheses of the study are as follows. NH1 : There is no normality on the daily stock returns of United States and the emerging markets of Asia during the pre crisis, crisis and post crisis periods. NH2: There is no stationary on the daily stock returns of United States and the emerging markets of Asia during the pre crisis, crisis and post crisis periods NH3: There is no effect of financial contagion during the Global Financial crisis on the emerging markets of Asia Selection of Sample In this study the sample consisted of nine indices of the stock exchange of the countries given in the report of MSCI Emerging Markets Asia Index as on March 30,2018 and the details are given in table 2 below. The Global Financial Crisis is considered in the study to identify the impact of financial crisis on Emerging Asian Markets. So Dow Jones Industrial Average is considered as the dependent variable. Table 1 Details of the List of Countries and their Respective Indices of the Stock Exhange Used in the Study S.No Name of the Name of the Stock Exchange Name of the Index Country 1 United States New York Stock Exchange Dow Jones Industrial Average 2 China Shanghai Stock Exchange SSE Composite Index 3 India Bombay Stock Exchange BSE Sensex 4 Indonesia Indonesia Stock Exchange Jakarta Composite Index 5 South Korea Korea Exchange Korea Composite Stock Price Index(KOSPI) 6 Malaysia Bursa Malaysia FTSE Bursa Malaysia Kuala Lumpur Composite Index 7 Pakistan Pakistan Stock Exchange Ltd KSE ALL SHARE Index 8 Philippines The Philippine Stock Exchange Inc PSEi 9 Taiwan Taiwan Stock Exchange Corporation Taiwan Stock Exchange Capitalisation Weighted Stock Index.(TAIEX) 10 Thailand Stock Exchange of Thailand SET Index Source: Data collected from the report on MSCI Emerging Markets Asia Index as on March30, editor@iaeme.com

5 M. Deivanai and Dr. S. Vanitha 3.6. Collection of Data The study was based on the data collected from secondary sources. The daily returns of the stock indices of nine emerging stock markets of Asia and the United States are the data of the study collected from Bloomberg database 3.7. Period of the Study The present study is an attempt to identify the impact of financial contagion due to the Global Financial Crisis 2008 on the emerging markets of Asia. In order to evaluate the impact of Global Financial crisis on a comparative basis between the pre crisis period and post crisis, the study examined the daily returns of indices of the stock markets of emerging markets of Asia and the United States based on the availability of data. We divide our study into four periods. Table 2 Details of the Period of the Study Entire Sample Period 1 st October 2003 to 31 st March 2018 Pre Crisis Period 1 st October 2003 to 31 st August 2008 Crisis Period 1 st September 2008 to 31 st March 2009 Post Crisis Period 1 1 st April 2009 to 31 st March 2014 Post Crisis Period 2 1 st April 2014 to 31 st March Tools used for Analysis Descriptive Statistics Augmented Dickey Fuller Test (ADF) GARCH(1,1) 3.9. Limitations of the Study The study suffers from the following limitations. The study is limited to the United States and Emerging East Asian Markets due to the Global Financial Crisis 2008 The study is based on secondary data collected from the Bloomberg database. Limited tools were used in this study to capture the normality, stationary and contagion. The study is limited to a particular period. 4. DATA ANALYSIS AND INTERPRETATION Table 3 Results of Descriptive Statistics of Daily Returns of the Indices of the United States and the Emerging Stock Markets of Asia due to the Global Financial Crisis for the Study Period of 1 st October 2003 to 31 st March 2018 Country United States Period Pre Crisis Period(1st October 2003 to Mean Max. Value Min. Value Std. Dev. Skewne ss Kurto sis India Obser Jarque- Bera Prob vation s editor@iaeme.com

6 The Impact of Financial Contagion on Emerging Asian Stock Markets with Special Reference to Global Financial Crisis Indonesia 31st August Malaysia 2008) South Korea Pakistan Philippines Thailand China Taiwan United States Crisis Period India (1st Indonesia September Malaysia 2008 to South 31st Korea March Pakistan 2009) Philippines Thailand China Taiwan United States Post Crisis Period India (1st April 2009 to Indonesia 31st March Malaysia 2014) South Korea Pakistan Philippines Thailand China Taiwan United States Post Crisis Period India (1st April 2014 to Indonesia 31st March Malaysia 2018) South Korea Pakistan editor@iaeme.com

7 M. Deivanai and Dr. S. Vanitha Philippines Thailand China Taiwan Source: Data has been collected from Bloomberg database and computed using E-views Table-3 discloses the descriptive statistics of Daily Returns of the Indices of the United States and the Emerging Stock Markets of Asia due to the Global Financial Crisis for the study Period of 1 st October 2003 to 31 st March During the pre crisis period highest mean of has been recorded for Indonesia and the lowest mean of has been recorded for Taiwan and United States. The maximum return of and the minimum return of has been recorded for Thailand. The standard deviation which denotes risk is higher for China(0.0182)and lowest for United States(0.0079). The skewness value is negative for all the countries which indicate longer tails towards left. The kurtosis value is greater than 3 which indicate the returns to be leptokurtic for all the values. The JarqueBera value is greater than 5. The probability value of all the return value is less than there is normality on the stock returns of United States and Emerging Markets of Asia. Therefore the null hypothesis of There is no normality on the daily stock returns of United States and the emerging markets of Asia during the pre crisis period is rejected. During the crisis period highest mean of has been recorded for China and the lowest mean of for United States and Indonesia. A negative mean has been recorded for all the countries except China. The maximum return of has been recorded for South Korea and the minimum return of has been recorded for Philippines. The standard deviation which denotes risk is higher for South Korea(0.0322)and lowest for Malaysia( ). The skewness value is negative for India, Indonesia, South Korea, Philippines, Thailand which indicate longer tails towards left. The skewness value is positive for United States, Malaysia, Pakistan, China and Taiwan which indicate longer tails towards right. The kurtosis value is greater than 3 which indicate the returns to be leptokurtic for all the values. The JarqueBera value is greater than 5 except India and Taiwan. The probability value of all the return value is less than 0.05 expect India and Taiwan therefore there is normality on the stock returns of United States and Emerging Markets of Asia expect India and Taiwan. Therefore the null hypothesis of There is no normality on the daily stock returns of United States and the emerging markets of Asia during the crisis period is rejected except India and Taiwan. The JarqueBera probability value is greater than 0.05 for India and Taiwan which indicates that the results are not much reliable. During the post crisis I period highest mean of has been recorded for Pakistan and the lowest mean of for China. A positive mean has been recorded for all the countries except China. The maximum return of has been recorded for India and the minimum return of has been recorded for Indonesia. The standard deviation which denotes risk is higher for China(0.0132)and lowest for Malaysia( ). The skewness value is negative for all the countries except India and Malaysia which indicate longer tails towards left. The skewness value is positive for India and Malaysia which indicate longer tails towards right. The kurtosis value is greater than 3 which indicate the returns to be leptokurtic for all the values. The JarqueBera value is greater than 5. The probability value of all the return value is less than 0.05therefore there is normality on the stock returns of United States and Emerging Markets of Asia. Therefore the null hypothesis of There is no normality on the editor@iaeme.com

8 The Impact of Financial Contagion on Emerging Asian Stock Markets with Special Reference to Global Financial Crisis daily stock returns of United States and the emerging markets of Asia during the post crisis period of 1 st April 2009 to 31 st March 2014 is rejected. During the post crisis II period highest mean of has been recorded for China and the lowest mean of for Malaysia. The maximum return of has been recorded for Thailand and the minimum return of has been recorded for China. The standard deviation which denotes risk is higher for China(0.0155)and lowest for Malaysia( ). The skewness value is negative for all the countries except which indicate longer tails towards left. The kurtosis value is greater than 3 which indicate the returns to be leptokurtic for all the values. The JarqueBera value is greater than 5. The probability value of all the return value is less than 0.05 therefore there is normality on the stock returns of United States and Emerging Markets of Asia.Therefore the null hypothesis of There is no normality on the daily stock returns of United States and the emerging markets of Asia during the post crisis period of 1 st April 2014 to 31 st March 2018 is rejected. Table 4 Results of Augmented Dickey Fuller Test of Daily Returns of the Indices of the United States and the Emerging Markets of Asia due to the Global Financial Crisis for the Study Period 1 st October 2003 to 31 st March 2018 Pre Crisis Period(1st October 2003 to 31st August 2008) Crisis Period (1st September 2008 to 31st March 2009) Post Crisis Period (1st April 2009 to 31st March 2014) Post Crisis Period (1st April 2014 to 31st March 2018) S.N o Country Particulars 1 United States t- Statistic Prob. t- Statistic Prob. t- Statistic Prob. t- Statistic ADF test statistic % level % level % level India ADF test statistic % level % level % level Indonesia ADF test statistic % level % level % level Malaysia ADF test statistic % level % level % level South Korea ADF test statistic % level % level % level Pakistan ADF test statistic % level % level % level Prob editor@iaeme.com

9 M. Deivanai and Dr. S. Vanitha 7 Phillipines ADF test statistic % level % level % level Thailand ADF test statistic % level % level % level China ADF test statistic % level % level % level Taiwan ADF test statistic % level % level % level Source: Data has been collected from Bloomberg database and computed using E-views Table-4 reveals the result of Augmented Dickey Fuller Test Augmented Dickey Fuller Test of Daily Returns of the Indices of the United States and the Emerging Markets of Asia due to the Global Financial Crisis for the Study Period of 1 st October 2003 to 31 st March The t-statistics value is lesser than the test critical values at 1% level, 5% level and 10% level and the probability value is less than There is stationarity on the stock returns of United States and Emerging Markets of Asia. Therefore the null hypothesis of There is no stationarity on the daily stock returns of United States and the emerging markets of Asia during the Study period is rejected. Table 5 Results of GARCH(1,1) model of Daily Returns of the Indices of the United States and the Emerging Markets of Asia due to the Global Financial Crisis for the Study Period 1 st October 2003 to 31 st March 2018 Country Pre Crisis Period(1st October 2003 to 31st August 2008) Crisis Period (1st September 2008 to 31st March 2009) Post Crisis Period (1st April 2009 to 31st March 2014) Post Crisis Period (1st April 2014 to 31st March 2018) α+β Prob α+β Prob α+β Prob α+β Prob United States India Indonesia Malaysia South Korea Pakistan Philippines Thailand China Taiwan Source: Data has been collected from Bloomberg database and computed using E-views. Table-5 reveals the GARCH(1,1) model of Daily Returns of the Indices of the United States and the Emerging Markets of Asia due to the Global Financial Crisis for the Study Period of 1 st October 2003 to 31 st March During the pre crises period the probability editor@iaeme.com

10 The Impact of Financial Contagion on Emerging Asian Stock Markets with Special Reference to Global Financial Crisis value is less than 0.05 for all the countries except Thailand which shows the existence of volatility. The sum of the α and β parameters are close to 1 which denotes high volatility. The high volatility in turn leads to increase in contagion effect. Therefore the null hypothesis of There is no effect of financial contagion during the Global Financial crisis on the emerging markets of Asia is rejected. During the crises period the probability value is not less than 0.05 for all the countries. The sum of coefficient of alpha and beta are close to one except Taiwan. Therefore there is high volatility except Taiwan. Therefore the null hypothesis of There is no effect of financial contagion during the Global Financial crisis on the emerging markets of Asia is rejected except Taiwan. During the Post Crisis Period of 1 st April 2009 to 31 st March 2014 the probability value is less than 0.05 for all the countries except South Korea, China and Taiwan which shows the existence of volatility. The sum of the α and β parameters are close to 1 which denotes high volatility. The high volatility in turn leads to increase in contagion effect. Therefore the null hypothesis of There is no effect of financial contagion during the Global Financial crisis on the emerging markets of Asia is rejected. During the Post Crisis Period of 1 st April 2014 to 31 st March 2018 the probability value is less than 0.05 for all the countries except Indonesia, Malaysia, South Korea, Philippines, China which shows the existence of volatility. The sum of the α and β parameters are close to 1 which denotes high volatility. The high volatility in turn leads to increase in contagion effect. Therefore the null hypothesis of There is no effect of financial contagion during the Global Financial crisis on the emerging markets of Asia is rejected. 5. FINDINGS OF THE STUDY The following are the findings of the study In the precrisis period the lowest mean has been recorded for US which denotes the initial stage of the crisis in the US During the crisis period the mean is negative for all the countries and the positive mean recorded for China is very low which denotes the prevalence of contagion among the stock markets. During the crisis period the maximum return and the highest standard deviation has been recorded for South Korea which denotes high return and high risk In the Post Crisis 1 period the mean for all the countries except China is positive which indicates the recovery from the crisis. During the Post Crisis 1 period the mean is the lowest and the standard deviation is the highest for China which indicate less return and high risk is involved During the Post Crisis 2 period the highest mean and the highest standard deviation has been recorded for China which denotes high risk and High return For the entire sample period the highest standard deviation has been recorded for China which denotes high risk There is stationarity on the daily stock returns of United States and the Emerging markets of Asia during the precrisis, crisis and post crisis periods. The study shows the presence of high volatility during the precrisis period The sum of alpha and Beta parameters are close to 1 during the sample period which denotes high volatility which in turn represents the presence of contagion effect. 6. CONCLUSIONS editor@iaeme.com

11 M. Deivanai and Dr. S. Vanitha The objective of this study to conduct an empirical investigation on the impact and existence of contagion on United States and the nine Emerging Markets of Asia over a period of GARCH(1,1) model is used to identify the existence of contagion. In order to capture the contagion the study period is divided into pre crisis, crisis, post crisis 1 and post crisis 2 periods. The findings suggest that the values of sum of the alpha and beta parameters are high which indicate the existence of contagion during the study period. REFERENCES [1] Gujarati.D, Basic Econometrics, Fifth Edition, Tata McGraw Hill, New Delhi [2] Gordan.E and Natarajan.K, Financial Markets and Services, Himalaya Publishing House, New Delhi [3] Kothari.C.R, Gaurav Garg, Research Methodology: Methods and Techniques, New Age Publisher, New Delhi, India. [4] Ibnu Khajar, The Global Stock Exchange and its Influence Towards the Indonesia Stock Exchange After the Global Financial Crisis in 2008, The International Journal of Organizational Innovation (2015). Vol 8, Num 1, 1 July Pp 133 to 154 [5] Dimitrios Dimitriou, Dimitris Kenourgios and Theodore Simos, Global Financial Crisis and Emerging Stock Market Contagion: A Multivaiate FIAPARCH-DCC Approach, International Review of Financial Analysis 30 (2013) pp 46 to 56 [6] Irfan Akbar Kazi, Khaled Guesmi and OlfaKaabia, Contagion Effect of Global Finanacial Crisis on OECD Stock Markets, Economic The Open Access, Open Assessment E-Journal (2011). Discussion Paper No [7] Lalith P.Samarakoon, Stock Market Interdependence, Contagion, and the US Financial Crisis: The Case of Emerging and Frontier Markets, Journal of International Financial Markets, Institutions & Money 21(2011). Pp 724 to 742 [8] RiadhAloui, Mohamed Safouane Ben Aissa and Duc Khuong Nguyen, Global Financial Crisis, Extreme Interdependence and Contagion Effect: The role of Economic Structure, Journal of Banking & Finance 35(2011). Pp 130 to 141 [9] Niklas Ahlgren, Jan Anteli, Stock Market Linkages and Financial Contagion, The Quarterly Review of Economic and Finance 50 (2010) Pp 157 to 166 [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] editor@iaeme.com