Abstract
This paper tested for a contagion effect between the foreign exchange market of the Eurozone and the markets of seven emerging and growth leading economies - EAGLEs - during the European Debt Crisis. For this purpose, we used the daily domestic currency per unit of US Dollar of seven EAGLEs countries from 01.01.2007 to 31.12.2012. The tranquil period was from 01.01.2007 to 19.10.2009 and the turmoil period was from 20.10.2009 to 31.12.2012. We found a contagion effect between the foreign exchange market of the Eurozone and the markets of Brazil, Mexico, and Turkey. The evidence suggests that foreign trade is likely to be the source of the contagion during the European Debt Crisis. The evidence presented in this paper is important for policy makers, international investors, and portfolio managers.
Highlights
The global crisis of 2008-2009, which was the biggest economic crisis since the Great Depression, started with the declaration by Bear Stearns, one of the biggest banks of the US, that two hedge funds had collapsed
The aim of this study is to test for the contagion of European Debt Crisis (EDC), which started in Greece and spilled over to the Eurozone, to emerging and growth leading economies emerging and growth-leading economies (EAGLEs) countries - and to reveal the channels of contagion
This paper tested for the existence of financial contagion in foreign exchange markets during the EDC using the DCC-GARCH (1,1) model
Summary
The global crisis of 2008-2009, which was the biggest economic crisis since the Great Depression, started with the declaration by Bear Stearns, one of the biggest banks of the US, that two hedge funds had collapsed. This became a global liquidity crisis following the bankruptcy of Lehman Brothers, one of the most important investment banks. Kristin Forbes and Roberto Rigobon (2002) define contagion as an increasing correlation between markets during a crisis period. Because two markets are mutually correlated during periods of stability, contagion exists if cross-market co-movement increases significantly when a shock to one market affects other markets (Forbes and Rigobon 2002; Sibel Çelik 2012)
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