Financial crises;

Sudden change in the financial market and greater ups and down in the stock market were the
major prediction of financial crisis. Economist agrees from that, that crisis have adverse affect on
the real economy. Krasner et al. (2007) investigated that the industries relying on external
sources of finance were suffered more value added losses during banking crisis. Braun and
larrain (2005) and kannan (2010) also investigated the firm relying on external finance were
suffer more during recession.

Kroszner et al (2007) also investigated the role of financial institutions such as banking sector.
They report that firms highly rely on external finance tend to experience greater impact of value
added losses during banking crisis.

The changing nature of financial crisis in economic hardships, instable political Government and
the collapse of few governments. What things the financial crisis even more severe was how they
spread across country to country in a different unexplained manner. In this article the author
Kevin Amonlirdviman (2004) predicts the probabilities of countries going into crisis through
crisis in the other country. The spread of the crisis is due to some financial and macroeconomic
variables such as sudden severe fall in stock index, devaluation of currency, low or negative
GDP growth rates, and the property prices collapsing. As these are the major variables which
cause the financial crisis. Although the East Asian crisis of 1997 have been happened of all these
variables. (Amonlirdviman, 2004). According to author (Amonlirdviman, 2004) its is possible to
expect the contagion of other financial crisis. Contagion refer to the economic boom or crisis
throughout the geographical area.

Default Contagion

It refers to default on its bonds or sovereign debt, which causes defaults in other countries.
(Goldfajn, 1999)

Stock Market Contagion

When stock market causes drops significantly through drops in other markets independent of
currency. (Goldfajn, 1999)
Political Contagion

Political instability may destabilize geographical regions promotes distress in surrounding

countries. (Goldfajn, 1999)

Testing for contagion of crises needs the definition of crisis. Several articles Glick and Rose
(1999) use famous press accounts to find the estimated start of crisis. Echengreen, Rose, and
Wyplosz (1996) present that to gave attention only towards devaluation of exchange rate can
miss other important and significant factors of market destruction. Crisis is often happen by an
attack move hurridly the devaluation of currency. However we can adjust or repel the attack by
raising interest rates. And additionally we can draw repel attacks by increasing monetary
reserves in non crisis periods. Echengreen, Rose, and Wyplosz (1996) developed an index of
exchange market pressure (EMP) that includes important tools that a monetary management has
its disposal. For the incident of crisis we use EMP index as a proxy.

According to author (1999) in 1997 a half century of economic booms came to crash. Some of
Asian economies early approved for high saving, balance budgets and investment rates, low
inflation and openness to the world market went into free fall (Jackson, 1999) the East Asian
financial crisis starts from Thailand and spread over to South East Asia and then the rest of the
countries of East Asia and these effects of contagion affects the countries worldwide (Rakshit,
2002). Countries that experienced crisis have decreasing exchange rates, high inflation, slow
exports and contradiction in imports and weakening of financial sectors (Kochhar, 1998). As the
crisis also spread toward the financial institution such as banking sector suffered greatly. For the
manufacturers the consequences of crisis are negative and the firms who depend on external
finance also suffered greatly (Jackson, 1999).