An Empirical Study On Contagion Effect Of Financial Crises In Emerging Markets

Since the 1990s, the frequent financial crises in emerging markets have attracted lots of researchers' attention. All of the crises, including ERM crisis in 1992-1993, Mexican crisis in 1994-1995, Asian crisis in 1997-1998, Russian crisis in 1998 and Argentine crisis in 2001, showed strong contagion effect. As a typical feature of financial crisis in emerging markets, the occurrence of contagion challenges the conventional financial crisis theory. Grasp the nature and potential causes of contagion is meaningful for developing countries to establish the contagion-proof measures and is the foundation of global financial stability in the background of economic integration and financial liberation.This paper compares the current literatures from which abstract the contagion definition, then analyzes the micro and macro base of contagion effect. After that, the paper uses a VAR model to test dynamically whether the contagion effect exists or not in three latest financial crises of emerging markets, that is the Asian crisis, Russian crisis and Argentine crisis, and the result is positive, especially for Asian crisis. Based on that, the paper uses the panel data of the three crises to analyze their potential causes empirically. According to the regressive result, the common reasons of contagion in the three crises are the state of capital account, the rate of foreign debt to GDP, the degree of financial liberation and the status of international trade, which is the base of preventing contagion for emerging markets.According to the empirical outcome, the emerging markets must enhance their own economic base, be cautious to open their financial market and capital account, and strengthen international cooperation, so that they can effectively prevent contagion effect. As for China, the detailed measures include: implement reliable macroeconomic policies, carefully open the capital account, boost up financial system's strength to resist external shock and set up early warning system.