This paper examines the empirical literature on financial market contagion in Asia during the 1997–98 financial crises with respect to existing tests of contagion. Empirical evidence shows that contagion affects both developed and emerging markets and does not seem to vary with the relative fundamental economic health or trade and financial linkages of the Asian economies. Contagion occurs across both asset types and geographical borders and tends to have larger effects in equity markets than in currency and bond markets. There is evidence to support the hypothesis that contagion is regional and transmitted through developed markets. A discussion of the behavior of correlation coefficients in the presence of contagion and financial crises suggests that they are not a reliable metric for detecting contagion.


Paper prepared for the Asian Economic Panel hosted by the Lowy Institute for International Policy and the ANU Centre for Applied Macroeconomic Analysis, Sydney, 13–14 October 2005. We would like to thank our discussant Chan Hyun Sohn and participants in the Asian Economic Panel for helpful comments. This project was funded under ARC Discovery grant DP0343418.

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