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Are emerging markets exposed to contagion from U.S.: Evidence from stock and sovereign bond markets

  • Irfan Akbar Kazi
  • Hakimzadi Wagan

The aim of this article is to examine: how the dynamics of correlations between five emerging countries (Argentina, Chili, Hungary, Russia and Poland), two emerging regions (Latin America (LAC) and Europe (EU)) and U.S. evolved from January 2004 to September 2011. The main contribution of this study is to explore whether the plunging stock market in U.S., in the aftermath of global financial crisis (2008-2009), exert contagion effects on emerging equity and sovereign bond markets. To this end we rely on Asymmetric Dynamic Conditional Correlation (ADCC) model developed by Cappiello et al. (2006), which accounts for asymmetries in conditional variances and correlations to negative returns. We show that there is mean shift in the estimated DCC immediately after the Lehman Brothers failure in September 2008. We refer this finding as contagion from U.S. stock market to emerging equity and sovereign bond markets especially in emerging LAC region.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-058.

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Length: 24 pages
Date of creation: 06 Jan 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-058
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  1. Erik Berglof & Yevgeniya Korniyenko & Alexander Plekhanov & Jeromin Zettelmeyer, 2010. "Understanding the Crisis in Emerging Europe," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(6), pages 985-1008, September.
  2. Dooley, Michael & Hutchison, Michael, 2009. "Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling-recoupling hypothesis," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1331-1349, December.
  3. Aloui, Riadh & Aïssa, Mohamed Safouane Ben & Nguyen, Duc Khuong, 2011. "Global financial crisis, extreme interdependences, and contagion effects: The role of economic structure?," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 130-141, January.
  4. Bertrand Blancheton & Christian Bordes & Samuel Maveyraud & Philippe Rous, 2012. "Risk of liquidity and contagion of the crisis on the United States, United Kingdom and euro zone money markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(2), pages 124-146, 04.
  5. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  6. Brenda González-Hermosillo & Heiko Hesse, 2011. "Global Market Conditions and Systemic Risk," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 10(2), pages 227-252, August.
  7. Andrew Powell & Juan Francisco Martínez, 2008. "On Emerging Economy Sovereign Spreads and Ratings," IDB Publications (Working Papers) 6735, Inter-American Development Bank.
  8. Go Tamakoshi & Yuki Toyoshima & Shigeyuki Hamori, 2012. "A dynamic conditional correlation analysis of European stock markets from the perspective of the Greek sovereign debt crisis," Economics Bulletin, AccessEcon, vol. 32(1), pages 437-448.
  9. Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series 0204, European Central Bank.
  10. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
  11. Nathaniel Frank & Heiko Hesse, 2009. "Financial Spillovers to Emerging Markets during the Global Financial Crisis," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(6), pages 507-521, December.
  12. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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