Testing Approach and Empirical Analysis on Contagion Effect Based on VAR Model

Abstract

With the improvement of integration of the international economy, propagation effect of the economic risks becomes increasingly striking. The international financial crises in the 1990's are typical cases that have exerted a contagion effect on the countries through the international financial system. Applying VAR model, this paper introduces a new method to testify the contagion effect of crisis by analyzing the Granger Causality change of the volatility of two markets and the change of impulse response of the infected country to original crisis country prior to and after crisis periods. I have also empirically examined the contagion effect in Asia with the application of this method.