stock market interdependence, contagion, and the u.s. financial crisis: the case of emerging and...
DESCRIPTION
This paper examines transmission of shocks between the U.S. and foreign markets to delineate interdependence from contagion of the U.S. financial crisis by constructing shock models for partially-overlapping and non-overlapping markets. There exists important bi-directional, yet asymmetric, interdependence and contagion in emerging markets, with important regional variations. Interdependence is driven more by U.S. shocks, while contagion is driven more by emerging market shocks. Frontier markets also exhibit interdependence and contagion to U.S. shocks. Except for Latin America, there is no contagion from U.S. to emerging markets. But there is contagion from emerging markets to the U.S.TRANSCRIPT
Stock Market Interdependence, Contagion, and
the U.S. Financial Crisis: The Case of Emerging
and Frontier Markets
Lalith Samarakoon
Professor of FinanceUniversity of St. ThomasSt. Paul, Minnesota, USA
Financial Management Association Meetings, Oct 19-22, 2011
Denver , Colorado
2
Research Objectives
To study the nature of propagation of return shocks between the U.S.
and emerging and frontier markets during the U.S. financial crisis.
Do the declines in stock markets around the world provide evidence
of contagion?
What is the magnitude of such contagion?
How is the contagion different during the crisis vs. tranquil periods?
3
Definition of Interdependence and Contagion
Interdependence
Co-movement of shocks during periods of stability (Forbes and Rigobon (2002))
Contagion
Excessive or incremental impact of shocks of one market on another during a crisis (Edwards, (2000), Forbes and Rigobon (2002), Bekaert et al. (2005))
4
Related Literature
Cross-market correlation studies: investigate return correlations across international markets as tests for contagion.
Evidence of contagion
King and Wadhwani (1990): contagion of 1987 U.S. market crash
across Japan, London, and New York.
Lin et al. (1994) : a bi-directional relation between unexpected daytime
returns and overnight returns between Tokyo and New York.
Karolyi and Stulz (1996): large shocks to Japanese and U.S. stock
market indices positively impact both the magnitude and the persistence
of return correlations.
No Contagion
Forbes and Rigobon (2002): Asian crisis, Mexican crisis, and the 1987
U.S. market crash.
Bekaert et al. (2005): Mexican crisis.
5
Related Literature
Co-movement of volatility across international stock markets (ARCH-type models)
Hamao et al. (1990): from New York to Tokyo and London, London to
Tokyo, but not in other directions; more pronounced during the market
crisis.
Bae et al. (2003): contagion is more important in Latin American than
in Asia, contagion from Latin America to other regions is more
important than contagion from Asia, and that the U.S. is largely
insulated from contagion from Asia.
Baele (2005): contagion from the U.S. to a number of European equity
markets during periods of high world market volatility.
6
Sample and Data
Foreign markets: daily price indices for 62 markets
22 emerging markets
40 frontier markets
U.S. market proxy: S&P 500 Index
Data sources: Bloomberg, Datastream, and MSCI
All returns are measured in U.S. dollar terms.
Sample period 01/04/2000 to 03/09/2009
U.S. Crisis Dummies (CD): 09/01/2008 to 03/09/2009
Other Crisis Dummies (OCD)
911 attacks: 09/11/2001 to 09/23/2001
Argentine economic and debt crisis: 10/19/2001 to 06/14/2002
7
Methodology
Specify conditional expected returns
AR(3) process of return
Estimated using rolling regressions of 240 daily returns to allow for
time-variation in coefficients.
Estimate return shocks
)1()(3
1
f,t
j
jf,tf,jff,t εrβαr
)2()(3
1
us,t
j
jus,tus,jusus,t εrβαr
)3()](ˆˆ[3
1
j
jf,tf,jff,tf,t rβα r e
)4()](ˆˆ[3
1
j
jus,tus,jusus,tus,t rβα r e
8
Methodology
Specify Shock Models (VAR System)
Partially-Overlapping Shock Model
Effect of U.S. shocks on foreign markets
Effect of Foreign market shocks on U.S.
)6()(
)()()()(
,
,,2211
f,ttf,ttf
f,ttfttfus,tus,us,tus,fus,t
vCDef
ecCDdebebae
)5()()(
)()()()()(
111,,
11,,,22,11,
f,ttus,t-tftus,ttf
us,t-tfus,ttfttff,tff,tfff,t
VCDeFCDeF
eCeCCDDeBeBAe
9
Methodology
Non-Overlapping Shock Model
Effect of U.S. shocks on foreign markets
Effect of Foreign market shocks on U.S.
)8()(
)()()()(
111,
11,11,2211
f,ttf,ttf
f,ttfttfus,tus,us,tus,fus,t
vCDef
ecCDdebebae
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)()()()(
,111,
11,11,22,11,
tftus,ttf
us,ttfttff,tff,tfff,t
VCDeF
eCCDDeBeBAe
10
Table 1: Sample and Summary Statistics
Region
Market
Time
Zone
Data Period
N
Total
Market
Capitalization
(USD Mil.)
Annualized
Standard
Deviation (%)
Correlation
Coefficient
with the U.S.
Cumulative
Return
During
Crisis
(%)
Before
Crisis
During
Crisis
Before
Crisis
During
Crisis
North America United States 2000/01 -2009/03 2,515 10,606,275 17 51 1.00 1.00 -39
Panel A: Emerging Markets
Asia China NO 2000/01 -2009/03 1,971 1,775,591 26 44 -0.01 0.07 -13
India NO 2000/01 -2009/03 2,057 637,281 25 51 0.07 0.49 -39
Indonesia NO 2000/01 -2009/03 2,155 95,911 23 44 0.04 0.16 -41
Malaysia NO 2000/01 -2009/03 2,016 186,323 16 21 0.02 0.14 -19
Philippines NO 2000/01 -2009/03 2,028 48,543 21 40 0.01 0.05 -30
South Korea NO 2000/01 -2009/03 2,021 484,028 29 52 0.10 0.26 -28
Taiwan NO 2000/01 -2009/03 2,053 386,688 25 38 0.08 0.15 -35
Thailand NO 2000/01 -2009/03 2,013 99,005 23 42 0.05 0.38 -37
Africa Egypt NO 2000/01 -2009/03 2,038 66,082 25 53 -0.05 0.21 -57
Middle East Israel PO 2000/01 -2009/03 2,018 100,397 19 44 0.22 0.25 -34
Morocco PO 2002/01 -2009/03 1,514 63,219 13 23 -0.01 0.15 -20
South Africa PO 2000/01 -2009/03 2,055 242,942 19 45 0.24 0.41 -33
Europe Czech Republic PO 2000/01 -2009/03 2,062 44,483 20 61 0.20 0.35 -57
Hungary PO 2000/01 -2009/03 2,055 18,939 22 56 0.23 0.47 -51
Poland PO 2000/01 -2009/03 2,062 92,658 20 39 0.19 0.41 -46
Russia PO 2000/01 -2009/03 2,044 265,217 34 96 0.14 0.24 -51
Turkey PO 2000/01 -2009/03 2,053 117,025 42 51 0.11 0.46 -40
South America Argentina PO 2000/01 -2009/03 2,028 352,258 33 60 0.27 0.62 -43
Brazil PO 2000/01 -2009/03 2,035 588,478 28 67 0.48 0.76 -31
Chile PO 2000/01 -2009/03 2,049 130,046 15 34 0.40 0.67 -15
Venezuela PO 2000/01 -2009/03 1,961 12,634 25 13 0.03 -0.07 -8
Peru PO 2000/01 -2009/03 2,048 44,770 18 53 0.18 0.57 -50
Average 266,024 24 47 0.14 0.33 -35
11
Table 1: Sample and Summary Statistics Continued
Region
Market
Time
Zone
Data Period
N
Total
Market
Capitalization
(USD Mil.)
Annualized
Standard
Deviation (%)
Correlation
Coefficient
with the U.S.
Cumulative
Return
During
Crisis
(%)
Before
Crisis
During
Crisis
Before
Crisis
During
Crisis
Panel B: Frontier Markets
Asia Bangladesh NO 2000/01 -2009/03 1,730 15,400 24 24 0.01 0.03 -8
Kazakhstan NO 2000/07 -2009/03 1,871 21,447 48 80 -0.07 0.06 -69
Mongolia NO 2000/01 -2009/03 1,956 407 88 21 0.00 -0.07 -44
Pakistan NO 2000/01 -2009/03 2,026 23,334 25 24 0.02 0.00 -38
Sri Lanka NO 2000/01 -2009/03 1,938 4,315 20 27 -0.02 -0.07 -30
Vietnam NO 2006/12 -2009/03 352 12,991 22 37 -0.04 0.01 -54
Africa Botswana NO 2000/01 -2009/03 1,482 3,463 13 9 0.05 0.01 -16
Ghana NO 2000/01 -2009/03 1,405 2,477 18 4 -0.05 -0.01 -9
Kenya NO 2000/01 -2009/03 1,949 10,253 13 22 -0.04 0.12 -47
Mauritius NO 2000/01 -2009/03 1,990 4,612 12 26 0.01 0.02 -44
Namibia NO 2003/12 -2009/03 1,044 80,375 23 53 0.20 0.36 -50
Nigeria NO 2000/01 -2009/03 2,328 43,816 14 16 -0.02 -0.06 -51
Tunisia NO 2000/01 -2009/03 1,885 5,373 9 15 -0.03 -0.07 -8
Middle East Abu Dhabi NO 2000/09 -2009/03 1,762 68,812 17 36 -0.03 0.19 -46
Bahrain NO 2004/07 -2009/03 895 18,952 9 16 0.02 -0.06 -41
Dubai NO 2003/12 -2009/03 1,177 63,146 29 56 0.00 0.07 -67
Jordon NO 2000/01 -2009/03 1,990 34,245 16 29 0.01 -0.06 -40
Kuwait NO 2000/01 -2009/03 1,731 105,216 14 23 -0.04 -0.08 -55
Lebanon NO 2000/01 -2009/03 1,982 8,327 21 25 -0.01 0.11 -41
Oman NO 2000/01 -2009/03 2,032 14,979 13 39 -0.03 -0.09 -49
Qatar NO 2000/01 -2009/03 2,065 69,055 25 53 0.01 0.02 -58
Saudi Arabia NO 2000/01 -2009/03 2,373 244,115 22 54 0.02 0.46 -50
Europe Bosnia PO 2006/02 -2009/03 531 5,643 26 33 -0.07 0.11 -57
Bulgaria NO 2000/10 -2009/03 1,834 6,143 22 47 -0.04 -0.01 -74
12
Table 1: Sample and Summary Statistics Continued
Region
Market
Time
Zone
Data Period
N
Total
Market
Capitalization
(USD Mil.)
Annualized
Standard
Deviation (%)
Correlation
Coefficient
with the U.S.
Cumulative
Return
During
Crisis
(%)
Before
Crisis
During
Crisis
Before
Crisis
During
Crisis
Panel B: Frontier Markets
Croatia PO 2002/06 -2009/03 1,970 26,647 19 51 0.09 0.53 -60
Estonia NO 2000/01 -2009/03 2,081 1,961 16 35 0.06 0.17 -51
Latvia NO 2000/01 -2009/03 2,107 1,623 22 42 -0.01 0.12 -58
Lithuania NO 2001/12 -2009/05 2,088 3,603 14 39 -0.01 0.15 -62
Malta NO 2000/01 -2009/03 2,036 3,423 13 13 -0.02 -0.02 -26
Montenegro PO 2004/06 -2009/03 921 2,863 22 54 0.02 0.06 -37
Romania NO 2000/01 -2009/03 2,001 12,672 28 56 0.02 0.36 -65
Serbia PO 2004/10 -2009/03 872 12,165 13 26 -0.01 0.11 -62
Slovakia NO 2000/01 -2009/03 1,945 6,350 20 20 0.04 0.06 -25
Slovenia NO 2000/01 -2009/03 2,008 10,904 12 39 0.03 0.19 -51
Ukraine PO 2000/01 -2009/03 1,986 42,537 28 54 0.01 0.25 -60
Central America & Caribbean Bermuda PO 2000/01 -2009/03 1,931 1,666 16 16 0.02 -0.16 -36
Costa Rica PO 2000/01 -2009/03 1,970 1,905 19 36 -0.03 -0.08 -31
Jamaica PO 2000/01 -2009/03 1,997 3,727 13 20 0.06 0.08 -23
Trinidad & Tobago PO 2000/01 -2009/03 1,163 7,904 6 8 0.04 -0.05 -26
South America Ecuador PO 2000/01 -2009/03 1,936 4,562 28 8 0.01 0.03 1
Average 25,285 21 32 0.005 0.07 -43
All Overall Average 110,708 22 37 0.05 0.16 -40
13
Table 2: Impact of U.S. Shocks on Emerging Markets
2R
Region Market Interdependence Contagion
2R DW
Concurrent Lagged Concurrent Lagged
Ct t-stat Ct-1 t-stat Ft t-stat Ft-1 t-stat
Panel A: Partially-Overlapping Markets
Africa Morocco -0.05 (-1.24) 0.09 (2.24)** 0.14 (1.57) 0.07 (1.15) 0.02 1.94
South Africa 0.37 (6.37)*** 0.53 (10.45)*** 0.25 (1.31) 0.23 (1.42) 0.28 1.99
Composite 0.25 (7.87)*** 0.36 (10.77)*** 0.15 (1.81) 0.06 (0.62) 0.17 1.98
Middle East Israel 0.27 (6.34)*** 0.31 (7.76)*** 0.08 (0.75) -0.01 (-0.05) 0.13 2.01
Europe Czech Republic 0.23 (4.87)*** 0.39 (8.56)*** 0.36 (2.10)** 0.17 (1.12) 0.21 1.97
Hungary 0.24 (3.62)*** 0.43 (8.14)*** 0.56 (2.68)*** 0.20 (1.03) 0.20 2.06
Poland 0.33 (7.59)*** 0.33 (7.87)*** 0.21 (1.27) 0.16 (1.04) 0.17 1.90
Russia 0.33 (4.90)*** 0.48 (9.66)*** 0.15 (0.50) 0.03 (0.15) 0.12 2.00
Turkey 0.59 (5.18)*** 0.70 (6.42)*** 0.05 (0.23) -0.33 (-1.51) 0.12 1.90
Composite 0.32 (12.91)*** 0.40 (16.35)*** 0.32 (6.19)*** 0.07 (1.20) 0.14 1.98
Latin America Argentina 0.56 (8.46)*** -0.02 (-0.20) 0.25 (1.62) 0.28 (2.53)** 0.13 1.91
Brazil 0.98 (11.23)*** 0.20 (2.02)** 0.34 (1.35) 0.27 (1.99)** 0.29 1.92
Chile 0.44 (11.48)*** 0.15 (3.67)*** 0.06 (0.58) 0.12 (1.91)** 0.24 2.07
Peru 0.21 (5.88)*** 0.18 (4.87)*** 0.58 (4.01)*** 0.11 (0.83) 0.19 2.06
Venezuela 0.05 (0.99) 0.08 (1.70)* -0.08 (-1.26) -0.01 (-0.14) 0.01 1.83
Composite 0.46 (18.82)*** 0.09 (4.03)*** 0.23 (2.56)** 0.08 (1.98)** 0.15 2.00
Composite 0.37 (23.67)*** 0.27 (18.01)*** 0.25 (5.44)*** 0.08 (2.06)** 0.14 1.99
14
Table 2: Impact of U.S. Shocks on Emerging Markets Continued
2R
Region Market Interdependence Contagion
2R DW
Concurrent Lagged Concurrent Lagged
Ct t-stat Ct-1 t-stat Ft t-stat Ft-1 t-stat
Panel B: Non-Overlapping Markets
Asia China 0.10 (2.27)** 0.17 (1.48) 0.03 2.04
India 0.43 (7.71)*** -0.33 (-3.01)*** 0.08 2.06
Indonesia 0.38 (5.42)*** 0.03 (0.27) 0.06 2.02
Malaysia 0.29 (10.02)*** -0.01 (-0.16) 0.17 2.09
Philippines 0.49 (9.07)*** 0.07 (0.79) 0.22 1.85
South Korea 0.64 (13.77)*** -0.13 (-0.86) 0.14 2.01
Taiwan 0.50 (12.26)*** -0.14 (-2.05)** 0.15 1.97
Thailand 0.30 (8.01)*** -0.14 (-1.23) 0.06 1.98
Composite 0.36 (20.43)*** -0.04 (-0.91) 0.07 2.00
Africa Egypt 0.18 (3.97)*** 0.35 (2.58)** 0.08 2.05
Composite 0.35 (20.89)*** -0.02 (-0.65) 0.07 2.00
15
Table 3: Impact of U.S. Shocks on Frontier Markets
Region Market Interdependence Contagion
2R DW
Concurrent Lagged Concurrent Lagged
Ct t-stat Ct-1 t-stat Ft t-stat Ft-1 t-stat
Panel A: Partially-Overlapping Markets
Europe Bosnia -0.04 (-0.43) 0.09 (1.03) 0.08 (0.57) 0.17 (1.56) 0.05 1.97
Croatia 0.05 (0.82) 0.33 (4.16)*** 0.48 (3.16)*** -0.06 (-0.45) 0.14 2.06
Montenegro 0.01 (0.08) 0.01 (0.01) 0.10 (0.88) 0.16 (1.37) 0.01 2.02
Serbia -0.56 (-0.89) 0.07 (1.21) 0.23 (2.52)** 0.21 (2.02)** 0.10 2.16
Ukraine 0.04 (0.76) 0.15 (2.64)*** 0.51 (2.07)** 0.06 (0.29) 0.04 1.98
Composite 0.01 (0.36) 0.16 (5.85)*** 0.31 (5.43)*** 0.15 (2.99)*** 0.07 1.99
Latin America Bermuda 0.03 (0.68) 0.05 (1.44) -0.05 (-0.93) -0.09 (2.14)** 0.01 2.01
Costa Rica 0.01 (0.30) -0.02 (-0.70) 0.07 (1.13) 0.06 (0.83) 0.00 2.11
Jamaica 0.04 (1.47) -0.03 (-0.91) 0.01 (0.26) 0.15 (2.79)*** 0.02 2.02
Trinidad & Tobago -0.01 (-0.26) 0.01 (0.18) -0.01 (-0.05) 0.01 (0.14) 0.00 2.24
Ecuador 0.03 (0.92) 0.03 (0.81) -0.09 (-1.56) -0.03 (0.76) 0.01 1.85
Composite 0.01 (0.11) 0.01 (0.65) 0.01 (0.13) 0.04 (1.63) 0.01 2.01
Composite 0.01 (0.36) 0.06 (4.68)*** 0.17 (4.64)*** 0.12 (3.83)*** 0.03 2.00
16
Table 3: Impact of U.S. Shocks on Frontier Markets Continued
Region Market Interdependence Contagion
2R DW
Concurrent Lagged Concurrent Lagged
Ct t-stat Ct-1 t-stat Ft t-stat Ft-1 t-stat
Panel B: Non-Overlapping Markets
Asia Bangladesh 0.07 (1.33) -0.11 (-1.50) 0.01 1.90 Kazakhstan 0.19 (1.90)* -0.09 (-0.40) 0.01 2.03
Mongolia 0.20 (1.37) -0.12 (-0.82) 0.00 2.03
Pakistan 0.08 (2.02)** -0.10 (-1.79) 0.00 1.92
Sri Lanka 0.05 (1.10) 0.27 (3.69)*** 0.04 2.13
Vietnam 0.05 (0.46) 0.30 (2.21)** 0.12 1.95
Composite 0.08 (2.39)** 0.08 (1.60) 0.01 2.00
Africa Botswana 0.17 (5.21)*** 0.02 (0.39) 0.05 2.04
Ghana -0.02 (-0.63) 0.01 (0.26) 0.04 2.09
Kenya 0.03 (0.65) 0.20 (2.98)*** 0.02 2.07
Mauritius 0.05 (1.79)* 0.17 (1.89)* 0.04 2.06
Namibia 0.81 (7.56)*** -0.02 (-0.13) 0.20 1.92 Nigeria -0.02 (-0.33) 0.04 (0.63) 0.00 2.03
Tunisia 0.06 (2.34)** 0.09 (1.69) 0.05 2.06
Composite 0.07 (4.25)*** 0.16 (3.59)*** 0.03 1.99
Middle East Abu Dhabi 0.09 (2.13)** 0.23 (2.74)** 0.09 1.83
Bahrain -0.05 (-2.11)** 0.15 (3.27)** 0.04 1.92
Dubai 0.19 (2.51)** 0.28 (2.45)** 0.09 1.91 Jordan 0.04 (1.80)* 0.28 (6.31)*** 0.10 1.80 Kuwait 0.05 (1.48) 0.07 (1.24) 0.02 2.03
Lebanon 0.02 ( 0.57) 0.10 (1.58) 0.02 1.96
Oman 0.02 (1.28) 0.37 (4.01)*** 0.14 1.82
Qatar 0.05 (2.03)** 0.49 (5.03)*** 0.14 1.94
Saudi Arabia 0.05 (1.53) 0.10 (0.78) 0.01 2.07 Composite 0.04 (2.72)*** 0.18 (5.11)*** 0.04 1.95 Europe Bulgaria 0.10 (1.51) 0.28 (2.04)** 0.06 1.88
Estonia 0.32 (9.46)*** 0.11 (1.35) 0.16 2.00
Latvia 0.11 (2.92)*** 0.13 (1.29) 0.03 1.93
Lithuania 0.21 (6.46)*** 015 (2.11)** 0.10 2.02
Malta 0.15 (0.38) 0.02 (0.44) 0.02 2.00 Romania 0.24 (4.11)*** 0.13 (0.85) 0.05 1.87 Slovakia 0.02 (0.51) 0.11 (1.47) 0.01 2.00
Slovenia 0.19 (6.09)*** 0.34 (4.25)*** 0.18 1.92
Composite 0.16 (11.81)*** 0.21 (5.51)*** 0.06 1.95
Composite 0.10 (10.32)*** 0.16 (6.87)*** 0.02 1.99
17
Table 4: Impact of Emerging Market Shocks on the U.S.
Region Market Interdependence Contagion
2R DW
Concurrent Lagged Concurrent Lagged
ct t-stat ct-1 t-stat ft t-stat ft-1 t-stat
Panel A: Partially-Overlapping Markets
Africa Morocco -0.01 (-0.44) 0.36 (1.19) 0.03 2.05
South Africa 0.20 (7.19)*** 0.12 (1.77)* 0.13 1.91
Composite 0.16 (8.81)*** 0.24 (4.37)*** 0.10 2.04
Middle East Israel 0.22 (5.91)*** 0.28 (2.13)** 0.13 2.20
Europe Czech Republic 0.15 (5.23)*** 0.11 (1.87)* 0.09 1.94
Hungary 0.12 (4.25)*** 0.18 (2.35)** 0.11 1.96
Poland 0.19 (8.03)*** 0.14 (1.75)* 0.12 1.95
Russia 0.11 (5.13)*** 0.06 (0.99) 0.07 1.91
Turkey 0.07 (5.15)*** 0.24 (3.71)*** 0.12 2.05
Composite 0.11 (13.24)*** 0.21 (6.95)*** 0.11 2.04
Latin America Argentina 0.10 (3.68)*** 0.49 (8.03)*** 0.21 1.95
Brazil 0.21 (12.92)*** 0.12 (2.03)** 0.28 1.94
Chile 0.39 (12.78)*** 0.31 (2.51)*** 0.25 1.97
Peru 0.19 (6.25)*** 0.42 (7.21)*** 0.20 1.98
Venezuela 0.01 (0.52) -0.48 (-1.10) 0.02 1.89
Composite 0.16 (12.65)*** 0.37 (10.20)*** 0.20 2.00
Composite 0.14 (20.50)*** 0.27 (11.07)*** 0.13 2.04
18
Region Market Interdependence Contagion
2R DW
Concurrent Lagged Concurrent Lagged
ct t-stat ct-1 t-stat ft t-stat ft-1 t-stat
Panel B: Non-Overlapping Markets
Asia China -0.03 (-1.49) 0.28 (2.45)** 0.03 1.94
India 0.07 (2.80)*** 0.31 (3.74)*** 0.10 1.90
Indonesia 0.02 (0.94) 0.32 (3.21)*** 0.06 1.95
Malaysia 0.05 (1.13) 0.51 (2.62)*** 0.04 1.96
Philippines 0.03 (1.24) 0.22 (1.43) 0.03 1.96
South Korea 0.07 (2.87)*** 0.14 (2.27)** 0.08 1.96
Taiwan 0.06 (2.37)** 0.33 (2.47)** 0.06 1.98
Thailand 0.04 (1.15) 0.50 (2.54)** 0.08 1.98
Composite 0.06 (8.07)*** 0.29 (8.89)*** 0.05 2.01
Africa Egypt -0.03 (-1.01) 0.17 (0.79) 0.03 2.07
Composite 0.05 (7.45)*** 0.30 (9.62)*** 0.05 2.03
Table 4: Impact of Emerging Market Shocks on the U.S. Continued
19
Robustness Tests
Results are robust to the following:
Alternative U.S. market proxies (Dow Jones Industrial Average)
Local currency returns
Alternative length of rolling regressions for computing time-varying
betas (120 vs 240 days)
Inclusion of more lags of own returns in shock models
Alternative definitions of the U.S. crisis period
06/02/2008 to 03/09/2009 (to include summer 2008)
01/02/2008 to 03/09/2009 9 (to include entire 2008)
Inclusion of post-crisis period
20
Key Findings & Implications
Bi-directional, yet asymmetric, interdependence and contagion between
the U.S. and emerging markets.
Interdependence is driven more by U.S. shocks than by emerging
market shocks.
During stable times, emerging markets are more sensitive to U.S.
shocks than the U.S. to emerging market shocks.
Contagion is driven more by emerging market shocks than by U.S.
shocks.
Emerging markets are largely insulated from additional shocks
during U.S. crisis.
U.S. becomes more sensitive to emerging market shocks during
the U.S. crisis.
Interdependence and contagion in frontier markets is small in magnitude.
21
Key Findings and Implications
Regional variations of interdependence
Although emerging markets in all regions exhibit dependence with
respect to U.S. shocks, the U.S. shows dependence with respect to
shocks from partially-overlapping emerging markets only.
Asian emerging markets have no important impact on the U.S. in stable
times.
Regional variations in contagion
Contagion from U.S. is important only in the South American emerging
markets.
Important contagion from Asian, European, and South American
emerging markets to the U.S.