Cross-Market Correlations and Financial Contagion from Developed to Emerging Economies: A Case of COVID-19 Pandemic

Abstract

In the event that the COVID-19 pandemic spreads across various stock markets, this study may be deemed as one of the primary studies to evaluate cross-market interactions. The study examines the spread of contagious effects originating from developed economies (the United States, the United Kingdom, and Japan) to selected emerging markets (China, India, Thailand, Taiwan, Egypt, South Africa, Saudi Arabia, and the United Arab Emirates). The countries studied are classified into three regions: developed economies, Asia, and Africa and the Middle East. The crisis period is identified with the deployment of the Markov regime-switching model. The conditional correlations are compared before and after the crisis episode using the time-varying multivariate DCC-GARCH model. The findings confirm that certain emerging markets are experiencing contagion from developed markets, while others remain unaffected. Overall, investors in the two regions examined (Asia, and Africa and the Middle East) have comparable diversification options. The findings are expected to bolster policymakers and international agencies in developing post-crisis measures.

The Contagion of International Crises: Implications of Inflation and Investor Sentiment on Stock and Treasury bond Returns

“…The DCC-GARCH model is a multivariate model and according to Siddiqui et al (2022) and Tsay (2005) presupposes the fulfillment of some steps characterized by the formulas:…”

Financial crises and financial contagion in Japan

“…В частности, изучалось распространение заражения по линии «Япония → Азиатский регион» и «Япония → Африка и Ближний Восток». В первом случае (рассчитывались попарные динамические корреляции с такими странами, как Индия, Китай, Тайвань и Таиланд) не было выявлено ни одного факта заражения, во втором (расчеты велись в связках с Египтом, ЮАР, Саудовской Аравией и ОАЭ) -выявлен один факт (Япония вызвала эффект заражения только в ОАЭ) [Siddiqui et al 2022]. В целом это свидетельствует о минимальной роли Японии как трансмиттера заражения в отношении развивающихся рынков.…”

Has the COVID-19 Pandemic Led to a Switch in the Volatility of Biopharmaceutical Companies?

“…Siddiqui et al [15] examined the contagion effect arising from the three major developed markets (the United States of America, the United Kingdom, and Japan) related to market capitalization on four emerging markets in Asia (China, India, Thailand, and Taiwan) and on Africa and the Middle East (Egypt, South Africa, Saudi Arabia, and the U.A.E.). The findings revealed the existence of contagion in six pairs within the Asian region, while there were seven pairs within the African and the Middle East regions displaying a contagion effect.…”

“…This model can also help to identify any spillover effects between different biopharmaceutical companies' stock prices, which can provide insights into how the pandemic has affected the industry. Empirical evidence for the usage of GARCH models in analyzing the impact of the COVID-19 pandemic on the volatility of biopharmaceutical companies has been supported by studies [8][9][10][11][12][13][14][15].The main conclusion of all of these studies is that the COVID-19 pandemic has significantly increased stock market volatility, showing a substantial increase in volatility during the pandemic period compared to the pre-pandemic period based on the results of GARCH family models. This suggests that the pandemic has introduced heightened uncertainty and market fluctuations, leading to greater volatility in the stock market.…”