Spreading crisis: Evidence of financial stress spillovers in the Asian financial markets

•China is the dominant transmitter of stress to Asian countries.•The total stress spillover index explains up to 53% of the forecast error variance.•Financial stress innovations result in positive and homogenous responses.•We find unidirectional Granger-causal effects from China and South Korea to Malaysia.

Employing a generalized vector autoregression (VAR) framework, this paper examines financial stress spillovers in five Asian countries, namely, China, South Korea, Malaysia, Thailand, and the Philippines, during turmoil periods. Our data span the period from the end of 1997 to early 2009, encompassing the impact of the 2007-2009 global financial crisis on several Asian economies. We use a financial stress index specifically designed for emerging economies as a proxy for financial stress, and our findings reveal significant cross-country stress spillover effects, where China is the dominant stress transmitter among the five countries during stressful periods. Further, the generalized impulse responses (GIRs) on stress innovations show a positive short-run effect up to one standard deviation before it fades away. Overall, our findings shed light on the dynamics of financial stress spillovers in the Asian financial markets.