The relation between economic fundamentals and stock market volatility in the east Asian crisis : an asymmetric garch

Abstract

Numerous researchers have observed a recurring phenomenon in which one countryʼs financial failure could bring about economic breakdowns in other nearby countries as a contagion effect. This paper examines whether the East Asian financial crisis can be explained by fundamental economic weaknesses. The financial crisis is defined as a significant increase in stock market volatility by using an asymmetric Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model. If the fundamental economic variables have significant effects on the volatility, it implies that the financial crisis was caused by fundamental economic weaknesses and not by contagion. I find that the stock market volatility of the victim-countries increased significantly. Moreover, I have some evidence that fundamental economic weaknesses are important in explaining the financial crisis.