Has co-movement dynamics in emerging stock markets changed after global financial crisis? New evidence from wavelet analysis

ABSTRACT

In this article, we revisit the issue of contagion, interdependence and changes in correlation structure after the Global Financial Crisis (GFC) of 2008 between developed and emerging markets in a time-frequency domain using a wavelet-based approach for the period spanning over 1 January 1999 to 8 November 2016. We report evidences of: (a) weaker contagion for Latin American emerging markets during GFC, (b) a strong contagion effect for emerging markets in Europe and the Middle East and (c) a fall in long-run co-movements after GFC, which means by investing in emerging markets, the diversification benefits can be derived in the long run. We report evidence of coexistence of contagion and permanent change in correlation structure.

KEYWORDS:

• Emerging markets
• co-movement
• wavelet
• contagion

JEL CLASSIFICATION:

• C22
• C40
• E32
• F30

Acknowledgments

We sincerely thank the anonymous reviewers for their insightful comments and suggestions that helped us to improve our article significantly.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For parsimony, the methodology section is explained in brief. For a detailed discussion and explanation readers are requested to refer Fernández-Macho (2012; 2017).

² The WI index consists of 23 developed markets: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US.

³ The EM LA index consists of five emerging markets: Brazil, Chile, Colombia, Mexico and Peru.

⁴ The EM Asia index consists of nine emerging markets: China, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Taiwan and Thailand.

⁵ The EM EME index consists of eight emerging markets: Czech Republic, Greece, Hungary, Poland, Qatar, Russia, Turkey and United Arab Emirates.

⁶ A structural break test was conducted following Hsu (1979), considering WI for the total sample period. Three breakpoints were determined: 05:19:2003, 09:01:2008 and 11:29:2011. However, the major variation occurred on 09:01:2008 among others. Thus, the study considered the occurrence of GFC as the point of structural divergence in stock markets (dates in MM: DD: YYYY format).