Abstract: This study investigates whether contagion or flight-to-quality occurred in Vietnam’s financial markets during the US subprime crisis in 2007. We apply the asymmetric dynamic conditional correlation model (ADCC-GARCH (1,1)) to daily stock-index and bond index returns of Vietnam’s and US stock markets. We test for contagion or flight-to-quality by using a test for difference in dynamic conditional correlation means. The results show a contagion between the US and Vietnam’s stock markets, confirming the widespread influence of the US stock market on a young market like Vietnam. This result suggests a low benefit from diversification for investors holding portfolios containing assets in Vietnam’s stock market and US stock market during the crisis. Moreover, the relationship between Vietnam’s stock and bond markets represents a flight-to-quality during the US subprime crisis. This finding shows that the investors tend to hold less risky assets, i.e., bonds, instead of stocks during this turbulent period in Vietnam.Keywords: international financial contagion, flight-to-quality, Vietnam, US subprime crisis, ADCC-GARC
