COVID 19: FINANCIAL SPILLOVER TO EMERGING ASIA^S FINANCIAL MARKET Chandra Susilo (a), Nur Dhani Hendranastiti (b)
a) Faculty of Economics and Business, University of Indonesia
b) Faculty of Economics and Business, University of Indonesia
Abstract
This paper aims to investigate the role of China compared to the US in transmitting spillover to ASEAN-5 countries (or vice versa) during COVID-19 recession.
We use the DECO GARCH model of Engle & Kelly (2012) to see the dynamic correlation between indexes and the spillover index by Diebold and Yilmaz (2012) to describe the direction of spillover between countries. This paper analyzes daily return data on stock market indexes of China, the United States, and ASEAN-5 for the period 2016 to 2022. The model provides a competing alternative with apparent advantages and results consistent with DCC GARCH model.
The findings demonstrate an increase in positive spillover correlation during the COVID-19 crisis between China and ASEAN-5. The volatility of the US and ASEAN-5 is more stable with a positive correlation even before the crisis. China and the US act as net transmitters (spillover to ASEAN-5 is higher than in the opposite direction).
The findings are beneficial to provide insight into Emerging Asia market connectedness which in turn may guide hedging strategies and portfolio risk management of investment in the region.
The study may contribute to the discussion on volatility spillover and stock market connectedness, especially during the COVID-19 recession in the Emerging Market and Developing Economies (EMDEs).
