Causality and contagion in emerging stock markets

Abstract

Given the evidence of occasional discrete shifts in the conditional variance process, it is essential to test the volatility transmission between financial markets when a reasonable suspicion exists for structural change. This paper aims to study the interdependencies in terms of stock market volatility and to assess the impact of Global Financial Crisis (GFC) on these interdependencies. We found evidence of structural breaks in the volatility of time series for the majority of markets. The results show also that, in view of the crisis, new significant causal linkages appeared together with the intensification of the causal relationship in 40% of the cases in which we find causality during both the tranquil and crisis period. These additional linkages during crisis periods in excess of those that arise during non-crisis periods contributes significantly in amplifying the international transmission of volatility and the risk of contagion.