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

a r t i c l e i n f o 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 bear-ish 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. The extent of recent Global Financial Crisis (GFC, hereafter) and the severe damaging consequences of being affected by contagion, characterized it as the worst financial crisis since the Great Depression of 1929. During crises, the issues of risk management and asset allocation are very important to practitioners and academics. So the impact and the transmission of shocks among financial markets is a crucial research area. There is a large body of literature on what the term " contagion " entails and on the channels of contagion. Some researchers argue that there are " fundamental " reasons for a significant increase in cross-market linkages after a shock to one country, while others refer to " pure " contagion which cannot be explained by changes in fundamentals. Pure contagion is specified as a significant increase in cross-market correlations after a shock and relates to shifts in inves-tors' appetite for or aversion to risk. When investors' appetite for risk falls, they immediately reduce their exposure to risky assets and consequently fall in value together. When investors' appetite for risk rises, demand for risky assets is increasing and their value rises simultaneously. Therefore, this type of contagion runs along the lines of risk and ignores fundamentals, trade and exchange rate arrangements (Kumar & Persaud, 2001). 1 …