Understanding network interdependence and contagion across East Asian markets: background, the East Asian financial crisis and institutional responses

Purpose
We estimate network spillovers across East Asian equity markets based on data on index returns to locate markets where equity shocks arise and where they impact. Focussed upon the context of the 1997 East Asian market crisis, our analysis explains why some markets were affected more than others. Further, were the Vietnam stock market to have been trading at that time, how it might have been affected.

Design/methodology/approach
Our analyses are based on novel panel data and spatial econometric techniques, adapted to “Big Data” contexts, to estimate network structural vector autoregression (SVAR) and vector autoregression (VAR) models estimated using additional information from East Asian and global markets.

Findings
We find that East Asian markets are interconnected through a sparse network, but this network has profound impacts across the markets, as evidenced during the 1997 East Asian crisis. We provide an explanation for why and how the Taiwan stock market was relatively immune to the crisis and highlight that the Vietnam market would likely have been affected very strongly.

Research limitations/implications
The results have substantial implications for market development and regulation, as well as greater integration across stock markets in East Asia. This is particularly important for nascent markets like Vietnam and rapidly integrating markets like Taiwan. However, future research needs to integrate trade flows with financial markets to obtain more encompassing insights and policy.

Practical implications
Our work offers new perspectives on institutional organisation and the regulation of information flows and risks across East Asian markets, including markets that are more recently created (such as Vietnam), markets that are highly integrated (such as China and Korea) and markets that are evolving through enhanced network exposure (such as Taiwan).

Social implications
We highlight that regional policy is important, as well as integration with regional (East Asian) and global markets. Development of robust resilient financial market institutions offers the best buffer against external shocks, which can otherwise have devastating impacts.

Originality/value
There is considerable debate about the nature and scale of contagion or interdependence during financial crises, not least the East Asian crisis of 1997. Indeed, there is no doubt that financial markets are interconnected. We offer new insights, from analysis of equity markets and their interdependence, on network effects spanning East Asian markets and their implications for crisis events.