The dynamics of the relative global sector effects and contagion in emerging markets equity returns

The paper decomposes the variance of emerging market equity returns to the global market and country specific constituents. The global component is then scaled by the country specific component to determine the relative global sector influence in country equity returns. Additionally, the paper explores contagion by testing for significant shifts in the BEKK-correlations between the emerging markets and the world market around the identified structural breakpints in crisis periods. Using the Quandt test of unknown breakpoint, evidence is provided of significant structural breaks in the relative global effects in all of the markets. Additionally, the identified structural breaks mostly correspond to global effects particularly the 2008 global financial crisis (GFC) and the 2007 global oil shocks (GOS) that heralded the GFC. The findings show that the global effects are time-varying, and that the GFC or GOS led to significant surge in the relative global influence in the emerging markets returns. The evidence indicates a reversion in the rate of change of the global effects to around the pre-GFC or pre-GOs level for all of the markets; however, there is no reversion in the global effects. This suggests that the increase in the global effects resulting from the GFC or the GOS may be permanent. Additionally, the findings infer contagion from the world to the emerging markets around the GFC.