Empirical study on the contagion effect of financial crisis

Through the function mechanism of economic system, sudden risk events in international economic activities cause a profound impact on international economy, and the impact scope and intensity are often difficult to estimate in advance. Study on financial crisis has always been hot among circles of international economy and finance. The recent crisis triggered by the U.S. subprime mortgage crisis shows that one of the typical manifestations of financial crisis is the contagion effect imposed on countries through financial market system. To prevent economy from being destroyed by financial crisis contagion, this paper puts forward to a new testing approach on the contagion effect of financial crisis based on VAR system. The method is to test the contagion effect of financial crisis through analyzing the changes in the causal relationship between each country´s market volatility before and after the crisis as well as the changes in a contagion-receiving country´s responses to the impact from the crisis-origin country. Empirical study shows that this new approach is effective and practical in testing the contagion effect of financial crisis.