Testing Financial Contagion in Emerging Countries: Evidence From BRICS Countries

Olivier Niyitegeka

doi:10.5430/ijfr.v13n1p42

Abstract

This study uses a Multivariate Generalised Autoregressive Conditional Heteroskedasticity (MGARCH) model to examine the pure form of financial contagion in BRICS countries (Brazil, Russia, India, China, and South Africa) in the wake of two major international financial crises namely the U.S. sub-prime and Eurozone sovereign debt crises (EZDC). The pure form of contagion refers to the spread of shocks that are unrelated to macroeconomic fundamentals and are simply the product of irrational phenomena like panics, herd behaviour, loss of confidence, and risk aversion. To investigate contagion the present study analyses the pairwise dynamic cross-correlation between the US and Eurozone equity markets as ‘source’ (ground zero) markets and individual BRICS stock markets as ‘target’ markets.For the each of the two crises that are examined the sets of data used, were divided into two sub-periods (1) the crisis period and (2) the stable period. For the Sub-prime crisis, the findings of the present study indicate the presence of cross-conditional volatility between the US and BRICS stock markets. The results also showed that the cross-conditional volatility coefficient is high in magnitude during periods of financial upheaval compared to a tranquil period, hence the conclusion that there was financial contagion during in BRICs stock markets (except in Chinese market) following the U.S. sub-prime crisis. As for the EZDC, equity markets in Brazil, India and China seemed to react equally (in both the ‘crisis’ and ‘post-crisis’ periods) from shocks emanating from European equity market. Hence the conclusion that there was no contagion in Brazil, India and China following the Eurozone sovereign debt crisis.

Highlights

The most prevalent features of emerging economies, include among others, a steady increase in GDP and GDP per capita, an increase in foreign trade exceeding that of international trade, the presence of foreign capital invested over the long-term, a diversified economy, a promising economic prospect, and political stability
The results showed that the cross-conditional volatility coefficient is high in magnitude during periods of financial upheaval compared to a tranquil period, the conclusion that there was financial contagion in BRIC stock markets following the U.S sub-prime crisis
In order to examine spillover volatility in BRICS equity markets following the sub-prime crisis, the present study uses two sub-periods, namely, the (i) ̳pre-crisis‘(Panel A) sub-period that ranges from 11th February 2005 to 1st February 2007 and (ii) thecrisis‘ (Panel B) sub-period that extends from 2nd February 2007(which corresponds to the explosion of the real estate bubble in the U.S.) to 10th July 2009

Summary

Introduction

The most prevalent features of emerging economies, include among others, a steady increase in GDP and GDP per capita, an increase in foreign trade exceeding that of international trade, the presence of foreign capital invested over the long-term, a diversified economy, a promising economic prospect, and political stability. Divergences, structural characteristics and vulnerability, to capital flows, can vary widely across emerging economies making it difficult to categorise them (Duttagupta & Pazarbasioglu,2021) For these reasons classifying emerging countries as a block — such as advanced countries block, the dollar block or the European block — has often proved to be a daunting task. There have been attempts to classify emerging countries into various of sub-groups, sometimes with well-known acronyms such as BEM, BENIVM, BNP, BRICK, BRICM, BRICS, BRICS+, BRICSAM, BRIICSSAMT, CIVETS, E7, EAGLES, MANGANESE, MINT, MIST, NEST, PPICS, TIMBI, VISTA among others These classifications, have been in most instances unsatisfactory (Ithurbide & Bellaich, 2019). According to Ithurbide and Bellaich (2019) this is because there are no safe havens or reserve currencies in the emerging world, the authors maintained that any common global factor (such as a surprise announcement by the reserve bank to raise rates, a sharp reversal in capital inflows, or the fear of a trade war) causes financial contagion, which affects emerging markets almost uniformly

Methods

Results

Conclusion