Exploring the Contagion Effect from Developed to Emerging CEE Financial Markets (2025)

Dynamic Conditional Correlation Analysis of Stock Market Contagion: Evidence from the 2007-2010 Financial Crises

International Journal of Economics and Financial Issues, 2013

This research examines the time-varying conditional correlations to the daily stock index returns. We use a dynamic conditional correlation (DCC) multivariate GARCH model in order to capture potential contagion effects between US and major developed and emerging stock markets during the 2007-2010 major financial crisis. Empirical results show substantial evidence of significant increase in conditional correlation or contagion as well as herding behavior during crisis periods. This result contrasts with the "no contagion" finding reached by Forbes and Rigobon (2002).

An Analysis of Contagion Effect on ASEAN Stock Market Using Multivariate Markov Switching DCC GARCH

Thai Journal of Mathematics, 2019

Contagion effect is a transmission of volatility from shocks arising in one country to other countries. Volatility transmission particularly occurs in emerging countries like the ASEAN. In this study, we investigate the contagion effect in eight stock of the South East Asia stock markets (ASEAN), namely stock exchange of Thailand (SET), Indonesia stock exchange (IDX), Hanoi stock exchange (HNX), Kuala Lumpur Stock Exchange (KSX), Singapore Exchange Limited (STI), The Philippine Stock Exchange, Inc. (PSEi), Cambodia Securities Exchange (CSX) and Lao PDR stock exchange (LSX) (which call ASEAN stock markets). The contagion effect is investigated using correlation analysis, thus, we employ the MS-DCC-GARCH model. The result of this research shows that ASEAN stock markets usually stay in high correlation regime and the degree of volatility is high. This indicates a strong contagion among ASEAN stock markets.

Analysis of volatility and contagion effect of countries from Latin America

2020

Objective: The volatility is a concern for investigators and scholars, both trying to understand and predict with a logical way the dispersion of returns for a given security or market index, but these movements have shown irregular, complex, and increasingly less influence of individual factors. Thus, the research investigates the volatility of the returns and checks out the comovements and countries’ contagion effects from Latin America. Methodology: The sample comprises daily data from January 2002 to December 2016 to measure the volatility of countries’ stock exchanges from Latin America. An Autoregressive model with Conditional Heteroscedasticity - ARCH/GARCH models – was used to measure the volatility. To check the stock exchanges’ contagion effects we used volatility models, vector autoregression models (VAR). Originality: The impact and behavior of volatility over the markets have been a significant concern for researchers and practitioners regarding the returns’ spread. To ...

Volatility and contagion: evidence from the Istanbul stock exchange

Economic Systems, 2004

This paper presents an empirical analysis of real stock return volatility contagion from emerging markets and financial centers to the Turkish market since 1992. We first present descriptive statistics and contemporaneous correlation of the real stock returns and unconditional stock return volatility. Using simple rolling regressions and goodness of fit measures, we identify periods of persistent volatility in the Istanbul Stock Exchange (ISE) and volatility contagion towards the ISE. Finally, using Generalized Autoregressive Conditional Heteroskedasticity (GARCH) estimations, we obtain robust estimates of volatility contagion from stock markets to the ISE. There is clear evidence of volatility contagion from the financial centers especially in the aftermath of the Asian Crisis to the ISE.

Dynamic correlation analysis of financial contagion: Evidence from Asian markets

We apply a dynamic conditional-correlation model to nine Asian daily stock-return data series from 1990 to 2003. The empirical evidence confirms a contagion effect. By analyzing the correlation-coefficient series, we identify two phases of the Asian crisis. The first shows an increase in correlation (contagion); the second shows a continued high correlation (herding). Statistical analysis of the correlation coefficients also finds a shift in variance during the crisis period, casting doubt on the benefit of international portfolio diversification.Evidence shows that international sovereign credit-rating agencies play a significant role in shaping the structure of dynamic correlations in the Asian markets.

Volatility spillovers and stock market co-movements among Western, Central and Southeast European stock markets

The aim of this paper is to examine the return and volatility spillovers and stock market co-movements among Western, Central and Southeast European stock markets. To examine the volatility spillover effects we employ a multivariate GARCH-BEKK (1, 1) model on a daily data from 2005 to 2014. There is a high and stable conditional correlation between Central and Western European markets during most of the analyzed period and the conditional correlation rises sharply during the periods of financial turmoil, suggesting some evidence on contagion. Conditional correlation between Croatian and Romanian markets and their Western counterparts is modest but it increases during the periods of financial crisis. Conditional correlation coefficients indicate that Macedonian and Serbian stock markets are relatively isolated from the advanced European markets. The return spillovers are investigated with the forecast-error variance decomposition based on the generalized VAR model. Following Diebold and Yilmaz (2012), we develop "spillover indices" based on the variance decomposition results on the generalized VAR model. The results indicate that total spillover index rose sharply during the periods of major financial disruptions. DAX and FTSE100 are the major net transmitters of spillovers to Central and Southeast European markets. There are bi-directional spillovers between DAX and FTSE100, between PX and WIG-20 and between MBI10 and BELEX15.

Dynamic Equicorrelation Analysis of Financial Contagion: Evidence from Latin America Markets

Journal of Applied Finance and Banking, 2021

This research employs the multivariate autoregressive moving average-generalized autoregressive conditionally heteroscedastic-dynamic equicorrelation (ARMA-GARCH-DECO) model to identify contagion among Latin American financial markets during financial turmoil period We analyze the dynamic conditional correlations among 18 American Depositary Receipts (ADR), 8 Exchange Traded Funds (ETF) and 6 Foreign Exchange Rates (Forex) Our sample includes daily closing prices from April 1, 2014, to January 29, 2021, for Argentina, Brazil, Chile, Colombia, Mexico, and Peru Results find long-run properties in the volatility of most instruments including those belonging to defensive super sector implying that defensive super sector and basic materials are the most impacted sectors during the last financial crises We present evidence that in times of economic disruption like in the midst of the COVID-19 pandemic, those financial assets do not act as safe harbor investments since they are relatively ...

Global financial crisis and emerging stock market contagion: A multivariate FIAPARCH–DCC approach

International Review of Financial Analysis, 2013

This paper empirically investigates the contagion effects of the global financial crisis in a multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) dynamic conditional correlation (DCC) framework during the period 1997-2012. We focus on five most important emerging equity markets, namely Brazil, Russia, India, China and South Africa (BRICS), as well as USA during different phases of the crisis. The length and the phases of the crisis are identified based on both an economic and a statistical approach. The empirical evidence does not confirm a contagion effect for most BRICS during the early stages of the crisis, indicating signs of isolation or decoupling. However, linkages reemerged (recoupled) after the Lehman Brothers collapse, suggesting a shift on investors' risk appetite. Moreover, correlations among all BRICS and USA are increased from early 2009 onwards, implying that their dependence is larger in bullish than in bearish markets. These findings do not show a pattern of contagion for all BRICSs' markets that could be attributed to their common trade and financial characteristics and provide important implications for international investors and policymakers.

Financial Market Contagion During the Global Financial Crisis: Evidence from the Moroccan Stock Market

International Journal of Financial Markets and Derivatives , 2014

In this paper, we aim at the study of the contagion of the global financial crisis (2007–2009) on Moroccan stock market. Our study focuses to examine whether contagion effects exist on Moroccan stock market, during the current financial crisis. Following Forbes and Rigobon (2002), we define contagion as a positive shift in the degree of comovement between asset returns. We use stock returns in MASI, CAC, DAX, FTSE and NASDAQ as representatives of Moroccan, French, German, British and US markets, respectively. To measure the degree of volatility comovement, time–varying correlation coefficients are estimated by flexible dynamic conditional correlation (DCC) multivariate GARCH model. We investigate empirical studies using the DCC–GARCH framework to test the contagion hypothesis from US and European markets to the Moroccan one.

Market linkages, variance spillovers, and correlation stability: Empirical evidence of financial contagion

Computational Statistics & Data Analysis, 2010

To model the contemporaneous relationships among Asian and American stock markets, a simultaneous equation system with GARCH errors is introduced. In the estimated residuals, the correlation matrix is analyzed over rolling windows and using a correlation matrix distance, which allows a graphical analysis and the development of a statistical test of correlation movements.

Uncovering equity market contagion among BRICS countries: An application of the multivariate GARCH model

The Quarterly Review of Economics and Finance

This paper assesses the extent of the transmission of financial shocks between South Africa and other members of the BRICS grouping in order to infer the degree of contagion during the period 1996-2012. The paper makes use of a multivariate VAR-DCC-GARCH model for this end. The paper finds evidence of cross-transmission and dependence between South Africa and Brazil. However, the empirical results show that South Africa is more affected by crises originating from China, India and Russia than these countries are by crises originating from South Africa. The findings of this paper should be of interest to policy makers in the BRICS grouping should they be considering the possibility of full capital market liberalization and to the international investor who is looking at diversifying portfolios in the BRICS grouping. .

Analysis of Contagion in Emerging Markets

SSRN Electronic Journal, 2006

The spread of crises from one country to another, named "contagion", has been one of the most debated issues in international finance in the last two decades. The presence of contagion can be detected by the increase in conditional correlation during the crisis period compared to the previous period. The paper presents a brief review of three of the most used techniques to estimate conditional correlation: exponential weighted moving average, multivariate GARCH models and factor analysis with stochastic volatility models. These methods are applied to analyze the contagion between the stock market of three major Latin American economies (Brazil, Mexico and Argentina) and two emerging markets (Malaysia and Russia). The data cover the period from 09/05/1995 to 12/30/2004, which includes several crises. In general, the three methods yielded similar results, but there is no general agreement. All the methods agreed that the contagion occurred mostly during the Asian crisis.

Dynamic correlation analysis of financial contagion in Asian markets in global financial turmoil

Applied Financial Economics, 2010

We apply a dynamic conditional-correlation model to nine Asian daily stock-return data series from 1990 to 2003. The empirical evidence confirms a contagion effect. By analyzing the correlation-coefficient series, we identify two phases of the Asian crisis. The first shows an increase in correlation (contagion); the second shows a continued high correlation (herding). Statistical analysis of the correlation coefficients also finds a shift in variance during the crisis period, casting doubt on the benefit of international portfolio diversification. Evidence shows that international sovereign credit-rating agencies play a significant role in shaping the structure of dynamic correlations in the Asian markets.

Financial contagion and volatility spillover in financial stock markets: a statistical review

International Journal of Financial Services Management, 2023

This study measures the extent of financial contagion in the Indian asset markets. In specific it shows the contagion in Indian commodity derivative market vis-à-vis bond, foreign exchange, gold, and stock markets. Subsequently, directional volatility spillover among these asset markets, have been examined. Applying DCC-MGARCH method on daily return of commodity future price index and other asset markets for the period 2006-16, time varying correlation between commodity and other assets are estimated. The degree of financial contagion in commodity derivative market is found to be the largest with stock market and least with the gold market. A generalized VAR based volatility spillover estimation shows that commodity and stock markets are net transmitters of volatility while bond, foreign exchange and gold markets are the net receivers of volatility. Volatility is transmitted to commodity market only from the stock market. Such volatility spillover is found to have time varying nature, showing higher volatility spillover during the Global Financial Crisis and during the period of large rupee depreciation in 2013-14. These results have significant implication for optimal portfolio choice.

On the study of contagion in the context of the subprime crisis: A dynamic conditional correlation–multivariate GARCH approach

Economic Modelling, 2016

This paper investigates the contagion hypothesis for ten developed and emerging stock markets (

Volatility and Contagion effects originating from the financial sector: An analysis of economic sectors in two different stock market downturns

2009

The essay applies the methodology put forward in Baur (2003) with some modifications and extensions in order to investigate on contagion and spillover effects originating from the financial sector in European and U.S. equity markets during the crisis following the "dotcom" bubble in 2000-2003 and the financial crisis of 2007-2009. A clear distinction between spillover and contagion effects is drawn and the first as well as the second moment is investigated. An EGARCH approach including a parameter to capture the leverage effect is applied to model the conditional variance. Mean contagion is found to be negative in the U.S. and mostly positive in Europe during the financial crisis which does not provide convincing evidence for the contagion hypothesis, rather the opposite. The more central role the financial sector plays during the financial crisis is clearly reflected in terms of positive volatility contagion in most non-financial sectors. We can conclude that the turbulences in the financial sector encroached partly upon non-financial sectors expressed through positive volatility contagion. Volatility contagion is consistently significant and positive in both the U.S. and Europe for the technology, industrials, and health care sector. However, the approach taken appears not suitable to clearly distinguish between supply-side and demand-side effects.

Contagion risk in Equity Markets during Financial Crises and COVID-19: A comparison of developed and emerging markets

Scientific Annals of Economics and Business

This study compared the impact of the Global Financial Crisis (GFC) and the COVID-19 pandemic on financial market contagion between developed and emerging markets. A DCC-GARCH model was employed to test the contagion effects of developed and emerging markets using weekly returns for the S&P 500 (US), FTSE-100 (UK), ASX 200 (AUS), IBOVESPA (BRA), BSE SENSEX (IND) and BVM IPC (MEX). The results showed that there was a persuasive case made for the integration of markets for efficient financial systems. However, a crisis occurring in one market holds significant repercussions for any of the connected markets. The findings show that the COVID-19 pandemic affected all the markets more severely than the GFC and contagion effects were more pronounced in emerging markets than in developed markets during the GFC and the pandemic. Consequently, policy makers in emerging markets should implement policies that reduce external vulnerabilities and improve their markets’ stability to reduce the imp...

Dynamic Correlation Analysis of Financial Spillover to Asian and Latin American Markets in Global Financial Turmoil

2010

This paper investigates the spillover of financial crises by studying the dynamics of correlation between eleven Asian and six Latin American stock markets vis-à-vis the US stock market. A regional factor that drives common movements of stock markets in each region is identified for the period from 1993 to early 2009. We then estimate the time-varying volatility correlation between the regional factor and the US stock market by an asymmetric dynamic conditional correlation model. We find that there is a significant rise in the estimated time-varying correlation in the period from August 2007 to March 2009, suggesting evidence of contagion from the US stock market to markets in the two regions during the global financial turmoil. The magnitude of the contagion effect to both regions in the global financial crisis is very similar, albeit their different economic, political and institutional characteristics. On the other hand, we find no evidence of having contagion from the US to the Asian region during the Asian financial crisis in 1997 and 1998 as expected, since the crisis was originated locally.

Cross-Market Correlations and Financial Contagion from Developed to Emerging Economies: A Case of COVID-19 Pandemic

Economies

In the event that the COVID-19 pandemic spreads across various stock markets, this study may be deemed as one of the primary studies to evaluate cross-market interactions. The study examines the spread of contagious effects originating from developed economies (the United States, the United Kingdom, and Japan) to selected emerging markets (China, India, Thailand, Taiwan, Egypt, South Africa, Saudi Arabia, and the United Arab Emirates). The countries studied are classified into three regions: developed economies, Asia, and Africa and the Middle East. The crisis period is identified with the deployment of the Markov regime-switching model. The conditional correlations are compared before and after the crisis episode using the time-varying multivariate DCC-GARCH model. The findings confirm that certain emerging markets are experiencing contagion from developed markets, while others remain unaffected. Overall, investors in the two regions examined (Asia, and Africa and the Middle East) ...

On emerging stock market contagion: The Baltic region

Research in International Business and Finance, 2016

This study provides new evidence on emerging stock market contagion during the Global Financial crisis (GFC) and the Euro zone Sovereign Debt Crisis (ESDC). Focusing on the three emerging Baltic markets and developed European markets, proxied by the EUROSTOXX50 stock index, we explore asymmetric dynamic conditional correlation dynamics across stable and crisis periods. Empirical evidence indicates a diverse contagion pattern for the Baltic region across the two crises. Latvia and Lithuania were contagious during the GFC, while they were insulated from the adverse effects of the ESDC. On the other hand, Estonia decoupled from the negative consequences during the global turmoil period, but recoupled during the ESDC. The results could be attributed to financial and macroeconomic characteristics of the Baltic countries before and after the turmoil periods and the introduction time of the Euro as a national currency.