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The Contagion Effects on Real Economy: Emerging Markets during the Recent Crises

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  • Hatice Gaye Gencer

    () (Department of Business Administration, Yeditepe University, Turkey. Corresponding author.)

  • Sercan Demiralay

    (Department of International Finance, Yeditepe University, Turkey.)

Abstract

In this paper, we analyze financial contagion in the emerging markets both at the aggregate and disaggregate levels during the global financial crisis (GFC) and the European sovereign debt crisis (ESDC). By using a market model derived from Bakaert et al. (2005) and Baur (2012), we investigate the possible propagation channels of financial contagion as follows: i) aggregate stock market contagion, ii) financial sector contagion, iii) real economy sector contagion from the financial system of the crisis- originating country and iv) idiosyncratic contagion effects to the real economy sectors transmitted through the emerging financial market. At the aggregate level, our results document contagion incidences only during the ESDC. At the sector level, the energy, the materials and the industrial sectors are exposed to financial contagion from the European financial market in the episode of the ESDC. With regard to the idiosyncratic contagion effects, the real economy sectors are heterogeneous in the sense that they display co-movements at varying magnitudes during both of the crises. However, the healthcare sector is found to be vulnerable to financial system shocks within the emerging markets during both turmoil episodes. In this context, our results are of particular importance for the international investors in order to design a well-diversified portfolio, as well as for the authorities to maintain global financial stability and to prevent and mitigate the financial contagion.

Suggested Citation

  • Hatice Gaye Gencer & Sercan Demiralay, 2016. "The Contagion Effects on Real Economy: Emerging Markets during the Recent Crises," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 104-121, March.
  • Handle: RePEc:rjr:romjef:v::y:2016:i:1:p:104-121
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    References listed on IDEAS

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    More about this item

    Keywords

    financial contagion; emerging stock markets; market model; regime switching; crises;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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