Non-Financial Markets and Interconnectedness between US and Emerging Financial Economies: Evidence from Covid-19 Financial Crisis
DOI:
https://doi.org/10.61506/01.00108Keywords:
financial contagion, emerging financial markets, financial econometrics, macroeconomic global risk factorsAbstract
During times of financial turmoil, when traditional assets experience significant volatility, commodity markets provide diversification benefits to investors. The objective is to investigate the factors influencing financial contagion between the United States and emerging Asian equity markets (China and India). The study analyzes the influential impact of the volatility index, gold, oil, and USD index on financial contagion among the markets. The dynamic conditional correlation analysis is utilized to explore the correlations during the US subprime and Covid-19 crises, and quantile regression analysis is conducted at different levels of time-varying correlations. The study's results suggest that financial contagion becomes more pronounced during periods of financial turmoil, and global financial crises contribute to alterations in the dependence structure between financial contagion among equity markets and global macroeconomic risk factors. The effect of financial contagion can be abridged through altering portfolio reallocation strategies according to investors’ risk appetite during high market volatility.
References
Abad, P., Chuliá, H., & Gómez-Puig, M. (2010). EMU and European government bond market integration. Journal of Banking & Finance, 2851–2860.
Ahlgren, N., & Antell, J. (2010). Stock market linkages and financial contagion: A cobreaking analysis. The Quarterly Review of Economics and Finance, 50, 157–166.
Ahmed Ayadi, M. G. (2021). Equity-commodity contagion during four recent crises: Evidence from the USA, Europe and the BRICS. Elsevier International Review of Economics & Finance, 376-423.
Ali, A. (2022). Financial Liberalization, Institutional Quality and Economic Growth Nexus: Panel Analysis of African Countries. Bulletin of Business and Economics (BBE), 11(3), 37-49.
Ali, A. (2022). Foreign Debt, Financial Stability, Exchange Rate Volatility and Economic Growth in South Asian Countries. Journal of Business and Economic Options.
Asadi, M., Roubaud, D., & Tiwari, A. K. (2022). Volatility spillovers amid crude oil, natural gas, coal, stock, and currency markets in the US and China based on time and frequency domain connectedness. Energy Economics, 109.
Audi, M., Ehsan, R., & Ali, A. (2023). Does Globalization Promote Financial Integration in South Asian Economies? Unveiling the Role of Monetary and Fiscal Performance in Internationalization. Empirical Economics Letters, 22(10), 237-248.
Bae, K.-H. (2003). A New Approach to Measuring Financial Contagion. The Review of Financial Studies, 717-763.
Balcilar, M., Elsayed, A. H., & Hammoudeh, S. (2023). Financial connectedness and risk transmission among MENA countries: Evidence from connectedness network and clustering analysis. Journal of International Financial Markets, Institutions and Money, 82. 6
Bandt, O. D., & Hartmann, P. (2000, November). Systemic Risk: A Survey European Central Bank. European Central Bank Working Paper no.35.
Benlagha, N., & Omari, S. E. (2022, may). Connectedness of stock markets with gold and oil: New evidence from COVID-19 pandemic. Finance Research Letters, 46.
Bissoondoyal-Bheenic, E., Do, H., Hu, X., & Zhong, A. (2022). Sentiment and stock market connectedness: Evidence from the U.S. – China trade war. International Review of Financial Analysis, 80.
Buchanan, B. G., English, P. C., & Gordon, R. (2011, March). Emerging market benefits, investability and the rule of law. Emerging Markets Review, 12(1), 47-60.
Chang, C.-L., McAleer, M., & Wang, Y.-A. (2020). Herding behavior in energy stock markets during the Global Financial Crisis, SARS, and ongoing COVID-19. Renewable and Sustainable Energy Reviews.
Cheng, I.-H., & Xiong, W. (2014). Financialization of Commodity Markets. Annual Review of Financial Economics.
Chiang, T. C., Jeon, B. N., & Li, H. (2007). Dynamic correlation analysis of financial contagion: Evidence from Asian markets. Journal of International Money and Finance, 1206-1228.
Dahlqvist, C. H. (2018). Cross-country information transmissions and the role of commodity markets: A multichannel Markov switching approach. PLoS ONE, 13(8), 0202251.
Dialga, I., & Vallée, T. (2021). The index of economic freedom: methodological matters. Studies in Economics and Finance, 38(3), 529-561.
Dogah, K. E. (2021). Effect of trade and economic policy uncertainties on regional systemic risk: Evidence from ASEAN. Economic Modelling.
Dogah, K. E., & Premaratne, G. (2023). Dynamic Interconnectedness and Risk Contagion among Asian Financial Markets. The Singapore Economic Review.
Domanski, D., & Heath, A. (2007). Financial Investors and Commodity Markets. BIS Quarterly Review, March 2007.
Dooley, M., & Hutchison, M. (2009). Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling–recoupling hypothesis. Journal of International Money and Finance, 1331–1349.
Engle, R. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroscedasticity Models. Journal of Business & Economic Statistics, 339-350.
Favero, C. A., & Giavazzi, F. (2002). Is the international propagation of financial shocks non-linear? Evidence from the ERM. Journal of International Economics, 57(1), 231-246.
Forbes, K., & Rigobon, R. (2001). Measuring Contagion: Conceptual and Empirical Issues. International Financial Contagion, 43-46.
Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. The Journal of Finance.
Gunay, S., & Can, G. (2022). The source of financial contagion and spillovers: An evaluation of the covid-19 pandemic and the global financial crisis. Plos one.
Junttila, J., Pesonen, J., & Raatikainen, J. (2018). Commodity market based hedging against stock market risk in times of financial crisis: The case of crude oil and gold. Journal of International Financial Markets,Institutions & Money, 56, 255-280.
Kocaarslan, B., Sari, R., Gormus, A., & Soytas, U. (2017). Dynamic correlations between BRIC and U.S. stock markets: The asymmetric impact of volatility expectations in oil, gold and financial markets. Journal of Commodity Markets, 7, 41-56.
Kocaarslan, B., Soytas, U., Sari, R., & Ugurlu, E. (2018). The Changing Role of Financial Stress, Oil Price, and Gold Price in Financial Contagion among US and BRIC Markets. International Review of Finance.
Kumar, S., & Persaud, A. (2001). Pure Contagion and Investors’ Shifting Appetite: Analytical Issues and Empirical Evidence. IMF Working Paper.
Longin, F., & Solnik, B. (1995). Is the correlation in international equity returns constant: 1960-1990? Journal of International Money and Finance, 14(1), 3-26.
Mensi, W., Ali, S. R., Vo, X. V., & Kang, S. H. (2022). Multiscale dependence, spillovers, and connectedness between precious metals and currency markets: A hedge and safe-haven analysis. Resources Policy, 77.
Mensi, W., Hammoudeh, S., & Kang, S. H. (2017, July). Risk spillovers and portfolio management between developed and BRICS stock markets. The North American Journal of Economics and Finance, 41, 133-155.
Morris, S. (2000). Contagion. The Review of Economic Studies, 57-78.
Nagle, P. (2020, May 08). Coronavirus and commodity markets: Lessons from history. Retrieved from World Bank: https://blogs.worldbank.org/voices/coronavirus-and-commodity-markets-lessons-history
OECD. (2020, March). Global financial markets policy responses to COVID-19.
Sergei, K. (2022, June 02). How Does The Market Perform During An Economic Recession? You May Be Surprised.
Shakirat Babatunde, K. D. (2021). Ease of Doing Business Index: An Analysis of Investors Practical View. Journal Economia, 101-123.
Uddin, G. S., Hernandez, J. A., Shahzad, S. J., & Kang, S. H. (2020). Characteristics of spillovers between the US stock market and precious metals and oil. Resources Policy, 66.
Zakoian, J. M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and control, 18(5), 931-955.
Zeng, H., Lu, R., & Ahmed, A. D. (2023). Dynamic dependencies and return connectedness among stock, gold and Bitcoin markets: Evidence from South Asia and China. Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1).
