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Dynamic Equicorrelation Analysis of Financial Contagion: Evidence from Latin America Markets

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  • Roberto Louis Forestal
  • Shih Ming Pi

Abstract

This research employs the multivariate autoregressive moving average-generalized autoregressive conditionally heteroscedastic-dynamic equicorrelation (ARMA-GARCH-DECO) model to identify contagion among Latin American financial markets during financial turmoil period. We analyze the dynamic conditional correlations among 18 American Depositary Receipts (ADR), 8 Exchange Traded Funds (ETF) and 6 Foreign Exchange Rates (Forex). Our sample includes daily closing prices from April 1, 2014, to January 29, 2021, for Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Results find long-run properties in the volatility of most instruments including those belonging to defensive super sector implying that defensive super sector and basic materials are the most impacted sectors during the last financial crises. We present evidence that in times of economic disruption like in the midst of the COVID-19 pandemic, those financial assets do not act as safe harbor investments since they are relatively more correlated during period of financial crises than in normal periods. Our findings have policy implications and are of interest to practitioners who look a better understanding of the dynamics of spillovers among the behavior of emerging financial assets. JEL classification numbers: C58, D53, G15.

Suggested Citation

  • Roberto Louis Forestal & Shih Ming Pi, 2021. "Dynamic Equicorrelation Analysis of Financial Contagion: Evidence from Latin America Markets," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(3), pages 1-2.
    • Handle: RePEc:spt:apfiba:v:11:y:2021:i:3:f:11_3_2
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic equicorrelation model; Latin America; American Depositary Receipts; Exchange Traded Funds; Foreign Exchange Rates; ARMA-GARCH.;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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