Abstract
This study assesses contagion from the USA subprime financial crisis on a large set of frontier stock markets. Copula models were used to investigate the structure of dependence between frontier markets and the USA, before and after the occurrence of the crisis. Statistically significant evidence of contagion could only be found in the European region, with the markets of Croatia and Romania being affected. The remaining European markets in our sample and the others, located in America, Middle East, Africa, and Asia, appear to have been isolated from the subprime crisis impact. These results are useful for international investors interested in enlarging the geographical diversification of their portfolios, but also for the considered countries’ policymakers who should attempt to improve the attractiveness of stock markets for domestic and foreign investors while simultaneously attempting to maintain their relative level of insulation against future foreign crises.
Highlights
In this study, we used copulas to investigate financial contagion from the USA subprime crisis to frontier markets
Pakistan was reclassified as an emerging market in May 2017. We considered it as a frontier market because it was how the country was classified at the time of data collection
Marginal distributions were estimated with maximum likelihood from the set of Gaussian, Gumbel, t-Student, and logistic copulas, and Akaike information criterion (AIC) values were used to select the most appropriate
Summary
We used copulas to investigate financial contagion from the USA subprime crisis to frontier markets. The subprime financial crisis has been considered the most severe event in recent history, only comparable to the stock market crash of 1929. The common attribute of all these episodes is that they caused dramatic drops in asset prices and increases in market volatility, firstly in the country of origin and subsequently in a number of other financial markets, with different sizes and structures. Such spreading of crises’ effects led researchers to investigate whether cross-market co-movements provide evidence of contagion
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