Financial Crises and Stock Market Contagion in a Multivariate Time-Varying Asymmetric Framework
Posted: 17 Oct 2010 Last revised: 9 Feb 2011
Date Written: October 8, 2010
This paper investigates financial contagion in a multivariate time-varying asymmetric framework, focusing on four emerging equity markets, namely Brazil, Russia, India, China (BRIC) and two developed markets (U.S. and U.K.), during five recent financial crises. Specifically, both a multivariate regime-switching Gaussian copula model and the asymmetric generalized dynamic conditional correlation (AG-DCC) approach are used to capture non-linear correlation dynamics during the period 1995-2006. The empirical evidence confirms a contagion effect from the crisis country to all others, for each of the examined financial crises. The results also suggest that emerging BRIC markets are more prone to financial contagion, while the industry-specific turmoil has a larger impact than country-specific crises. Our findings imply that policy responses to a crisis are unlikely to prevent the spread among countries, making fewer domestic risks internationally diversifiable when it is most desirable.
Keywords: Financial Crises, Contagion, Multivariate Regime-Switching Copula, AG-DCC Model
JEL Classification: F30, G15
Suggested Citation: Suggested Citation