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Title: Essay on International Transmission of Shocks
Keywords: shock transmission, structural VAR, structural oil shocks, financial contagion, modified garch-in-dcc model
Issue Date: 19-Jul-2010
Citation: YAN TONGJI (2010-07-19). Essay on International Transmission of Shocks. ScholarBank@NUS Repository.
Abstract: This thesis is composed of three essays on international transmission of shocks. The first chapter examines international linkages of a set of key macroeconomic variables in a multi-variable multi-country setting. A multi-variable cointegrating structural VAR model is constructed using trade matrices developed by Abeysinghe (1999) and Abeysinghe and Forbes (2001). We include in the model a set of key macroeconomic variables, namely real GDP, CPI, equity price, interest rate and exchange rate for ASEAN countries and their major trading partners. Structural impulse responses are derived to study various international transmission effects of different economic and financial shocks. Interestingly, we find the international transmission of real shocks such as GDP shock is not as strong as what is expected in some literature. In most cases, foreign shocks will be swamped by the shock originated within that country. On the other hand, financial shocks can be transmitted to other countries rapidly and the impacts are quite substantial. The finding also confirms that the US plays a prominent role in the international propagation of shocks to ASEAN countries, while the Philippines are the most isolated country in the region. The second chapter investigates how different types of structural oil shocks affect the GDP growth of different economies directly and indirectly. We first decompose oil-price changes into three structural shocks, namely oil-supply shocks, aggregate demand shocks and oil-specific demand shocks by modifying Kilian (2007)?s structural VAR model. We then incorporate the structural oil shocks into Abeysinghe (2001)?s structural VARX model to examine the direct and indirect effects of various oil shocks on the GDP growth. A set of 12 economies including ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand), NIE-4 (South Korea, Hong Kong, Singapore, Taiwan), China, Japan, USA, and the rest of OECD as one country are selected for study. It is found that different structural oil shocks have strikingly different effects on the GDP growth, and the indirect effect of an oil shock through trading partners plays a very important role in the economic growth. In the third chapter, we propose a new testing methodology for contagion under the consideration of the relationship between time-varying volatility and correlation. To capture the volatility effects on correlations, we develop a GARCH-in-DCC model based on Engle?s (2002) dynamic conditional correlation (DCC) model. Empirical results show that the model is able to better capture the dynamics in conditional correlation. The LR test confirms that the GARCH-in-DCC model performs better than standard DCC model in most cases. We then modify the proposed GARCH-in-DCC model and apply it to test for contagion during the 1997 Hong Kong stock market crash. Our testing results are compared with the results from traditional test.
Appears in Collections:Ph.D Theses (Open)

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