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The Contagion Effect from U.S. Stock Market to the Vietnamese and the Philippine Stock Markets: the Evidence of DCC – GARCH Model

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The Contagion Effect from U.S. Stock Market to the Vietnamese and the Philippine Stock Markets: the Evidence of DCC – GARCH Model Thao Phan Thi Dieu LE, Hieu Luong Minh TRAN / Journal of Asian Finance, Economics and Business Vol 8 No 2 (2021) 0759–0770 759 Print ISSN: 2288-4637 / Online ISSN 2288-4645 doi:10.13106/jafeb.2021.vol8.no2.0759 The Contagion Effect from U.S. Stock Market to the Vietnamese and the Philippine Stock Markets: The Evidence of DCC – GARCH Model Thao Phan Thi Dieu LE1, Hieu Luong Minh TRAN2 Received: November 05, 2020 Revised: December 30, 2020 Accepted: January 15, 2021 Abstract Using a DCC – GARCH model analysis, this paper examines the existence of financial contagion from the U.S. stock market to the Vietnamese and the Philippine stock markets during the global financial crisis and the COVID-19 pandemic crisis. We use daily data from the S&P 500 (U.S.), VN-Index (Vietnam), and the PSEi (the Philippines). As a result, there is no evidence of contagion from the U.S stock market to the Philippine stock market that can be found during global financial crisis, while the Vietnamese market is influenced by this effect. Besides, both these developing stock markets (the Vietnamese and Philippine stock markets) are influenced by the contagion effect in COVID-19 pandemic crisis. Another finding is that the contagion effect during the coronavirus pandemic crisis in Vietnam is smaller than that during the global financial crisis, however, the opposite is the case for the Philippines. It is noticed that the Philippines seems to be more affected by the contagion effect from the COVID-19 pandemic than Vietnam at the time of this study. Because financial contagion is important for monetary policy, asset pricing, risk measurement, and portfolio allocation, the findings in this paper may give some useful information for policymakers and investors. Keywords: Contagion, COVID-19, Financial Crisis, DCC – GARCH, Stock Market JEL Classification Code: C58, G01, G15 1. Introduction on other markets around the world. These co-movements of different nations in financial markets may arise from Over a decade ago, financial markets suffered from the contagion or interdependence between financial markets global financial crisis triggered by a downturn of the U.S. (Celik, 2012). subprime mortgage market. The global financial crisis In the beginning of 2020, the coronavirus has appeared, exposed weaknesses that existed in financial industry and caused a worldwide pandemic. Since the COVID-19 regulations and the financial systems all over the world pandemic has been declared as global health emergency (Mighri & Mansouri, 2013). Not only the value of U.S stock by the World Health Organization, the world economy price decreased, but also the stock price of other countries has suffered heavy losses. Due to COVID-19 pandemic, went down during crisis period. These cases imply that customers have changed their consumption behavior, movements in one stock market may have a powerful impact which has led to a decline in sales and production; hence, companies have fallen into severe financial burdens, and the unemployment rates rose worldwide. Such serious changes in business and economy around the world are expected to 1First Author. Associate Professor, Faculty of Finance, Banking affect stocks. From an investment perspective, it is necessary University of Ho Chi Minh City, Vietnam. Email: [email protected] to assess the impact of the COVID-19 pandemic on the 2Corresponding Author. Banking University of Ho Chi Minh City, stock market. The purpose in doing this is to determine Vietnam [Postal Address: 36 Ton That Dam Street, Nguyen Thai Binh Ward, District 1, Ho Chi Minh City 700000, Vietnam] complexity traits of the stock market before and during the Email: [email protected] COVID-19 Pandemic. Financial volatility has been impacted by many different © Copyright: The Author(s) This is an Open Access article distributed under the terms of the Creative Commons Attribution reasons. According to Becketti and Sellon (1989), there are Non-Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the many factors that cause changes in financial volatilities original work is properly cited. such as increasing in inflationary expectations, restricting Thao Phan Thi Dieu LE, Hieu Luong Minh TRAN / 760 Journal of Asian Finance, Economics and Business Vol 8 No 2 (2021) 0759–0770 monetary policy, and the elimination of interest rate ceilings market to the Vietnamese and the Philippine stock markets which led to the volatility of interest rates. The collapse of during the period of COVID-19 pandemic, compared with stock prices in the year 1997 also contributed to an increase during the global financial crisis. in volatility of interest rates and exchange rates (Ezzati, 2013). This is a phenomenon that had received attention of 2. Literature Review many investors and financial market analysts. Contagion is one of the definitions debated most in Worthington and Higgs (2004) explore the causes literature. In this paper, contagion is defined based on and extent of contagion of volatility in three developed the definition of Forbes and Rigobon (2002), which is a Asian stock markets in Hong Kong, Japan, and Singapore significant rise in the cross-market correlation during the and six emerging markets in Indonesia, Korea, Malaysia, crisis period. Hence, it is essential that the correlation between the Philippines, Taiwan, and Thailand using MGARCH two financial markets should be compared in relatively model. The results of the study demonstrate the existence stable period (pre-crisis) and turmoil period (crisis period). of contagion effects and show the volatility of all markets, If two markets are moderately correlated during stable especially for developing markets. However, the volatility periods and the appearance of a shock to one market leads of these markets is largely determined by the historical data to a dramatic increase in market co-movement, this would itself rather than by the influence of external shocks. create contagion. Nevertheless, if the correlation between Chiang et al. (2007) apply the DCC – GARCH model two markets is traditionally high, even if its correlation to analyze the contagion effects of volatility across continues to soar after one market experiences an economic nine stock markets in Asia from 1990 to 2003 using the shock, this may not generate contagion (Celik, 2012). In historic stock prices of these markets along with daily. other words, contagion only appears if the cross-market Research results demonstrate that there are the contagion correlation goes up significantly in the period of crisis. If there effects between observing markets. Chiang et al. (2007) is not a significant increase in correlation, this co-movement examine a series of correlation coefficients in order to between financial markets is called interdependence that find out two periods of the Asian crisis: the first period refers to strong real linkages between two economies shows an increase in the correlation (contagion) and the (Forbes & Rigobon, 2002). Although the contagion effects second period shows that the correlation continues to rise. among developed markets or to developing markets have In addition, the results also indicate that variance values​​ been confirmed in several papers (Calvo & Mendoza, 2000; have changed during the crisis period, leading to doubts Bekaert et al., 2005; Chiang et al., 2007; Cho & Parhizgari, as to whether diversifying international portfolios is truly 2008; Bouaziz et al., 2012; Celik, 2012; Alam et al., 2020; beneficial or not. Khan et al., 2020; Alshammari et al., 2020), to the best of Horta et al. (2008) examine contagion effects of American authors’ knowledge, the previous study has not explored subprime mortgage crisis on Italian, UK, French, German, the contagion effects of volatility return from a developed Canadian, Japanese, and Portuguese stock exchange markets market like U.S. stock market to the Vietnamese stock by using copula models. As a result, while Canada, Japan, market and the Philippine stock market in both the global Italy, France and UK get remarkable contagion impact, this financial crisis, and the COVID-19 pandemic, and then, has impact for Germany is not significant as other countries. compared the results between these two crises. The most contagion influence is found out in Canadian Vietnam and the Philippines are developing countries stock market. which are assessed as having remarkable economies in Mulyadi (2009) tests the contagion effects of volatility in Southeast Asia. According to World Intellectual Property U.S, Indonesian and Japanese capital markets for five years Organization (2019), both Vietnam and the Philippines (2004–2008). By using and exploiting the GARCH model ranked as lower-middle income countries which have the (1, 1), the results show that the contagion effect between innovation performance of economy above expectations for Indonesia and Japan is bidirectional, while that between their level of development. Moreover, thanks to participating Indonesia and the U.S. has a one-way spread effect, namely in the Association of Southeast Asian (ASEAN), the from the U.S. to Indonesia. Asia-Pacific Economic Cooperation (APEC), and the World Naoui et al. (2010) examine the existence of contagious Trade Organization (WTO), Vietnam and the Philippines phenomenon following the U.S. financial crisis for six have become more integrated with the world economy. It developed stock markets and ten emerging stock markets also means that their stock markets are more closely related by using Dynamic Conditional Correlation model to the global financial markets. Because of the reasons (DCC – GARCH). They prove that the contagion effect is stated above, this paper uses the DCC – GARCH model in very strong between the United States and the developed and order to examine the contagion effect from the U.S. stock developing countries over the subprime crisis. Thao Phan Thi Dieu LE, Hieu Luong Minh TRAN / Journal of Asian Finance, Economics and Business Vol 8 No 2 (2021) 0759–0770 761 Figure 1: Stock market price series Sok-Gee et al.
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