Emerging Market Contagion Under Geopolitical Uncertainty

ABSTRACT

We find that 10 emerging stock markets have high risk of contagion on the regional level but lower spillover with respect to the global markets, implying a potential for diversification benefits between emerging and global markets. Regional market integration seems to have been caused by trade integration, which has a policy implication for trade agreements’ systemic risk effects. We find that the geopolitical risk has no impact on either the return, or volatility spillovers. However, the general stock market risk (VIX) is connected to individual market volatilities, while the oil market is largely receiving the spillovers from the other markets.

KEYWORDS:

• contagion
• equity market
• financial crises
• spillover

JEL CLASSIFICATION:

• C32
• C58
• G10

Acknowledgments

We appreciate helpful comments and suggestions from Bo Sjö, Ali Ahmed, Stelios Bekiros, two anonymous referees, and the Editor Ali Kutan. We also greatly benefited from the discussions with the seminar participants at the Economics Division, Linköping University, Sweden, ERFIN conference in Warsaw School of Economics 2017 and the INFINITI2018 conference in Poznan, Poland. Gazi Salah Uddin is thankful for the financial support provided by the Jan Wallander and Tom Hedelius Foundations and Simon Foundation for travel grant. Part of this work was completed when Juha Junttila was visiting the Trinity Business School at Trinity College Dublin, Ireland, and Junttila thanks Brian Lucey and the School for their great hospitality during the visit, and the Research Foundation of the OP Group for financial support. This research belongs to the Research Agenda of the JyIMaF research group at the University of Jyvaskyla, Finland.

Supplementary material

Supplementary material for this article can be accessed here.

Notes

1. The selection criteria used by Bloomberg are composed of a dozen variables. For economic outlook, they look at the IMF forecasts for GDP growth, inflation, government debt, and total investment. From the World Bank database, they took demographic and economic development. The literacy rate, age of population, labor market participation, and electricity consumption are taken from the International Energy Agency. For financial markets, they use the price earnings ratios of equities, liquidity, and currency volatility from the Bloomberg financial dataset. They also include Ease of Doing Business Index from the World Bank, Corruption Perceptions Index from Transparency International and the Wall Street Journal/Heritage Foundation’s Index of Economic Freedom. Altogether, these make up a good and stable set of selection criteria among the emerging countries.

2. Russia has missing data from 1990 to 2010 in the World Development Index (WDI) database, but it has a high company listing and market capitalization for the existing time periods.

3. For an early study with exogenous bank network, see Allen and Gale (2000).