بحران منطقه یورو و بازارهای سهام BRIICKS : انتقال و یا وابستگی متقابل بازار؟

This paper examines the financial contagion in an emerging market setting by investigating the contagion effects of GIPSI (Greece, Ireland, Portugal, Spain and Italy), USA, UK and Japan markets on BRIICKS (Brazil, Russia, India, Indonesia, China, South Korea and South Africa) stock markets. During Euro-zone crisis period (October 19, 2009–January 31, 2012), the empirical results indicate that among GIPSI countries, Ireland, Italy and Spain appear to be most contagious for BRIICKS markets compared to Greece. The study reports that Brazil, India, Russia, China and South Africa are strongly hit by the contagion shock during the Eurozone crisis period. However, Indonesia and South Korea report only interdependence and not contagion. From policy perspective, the findings provide useful implications for possible decoupling strategies to insulate the economy from contagious effects. For multilateral organizations like International Monetary Fund (IMF) and World Bank, the study will provide an important direction in undertaking coordinated rescue measures for the vulnerable as well as contagious countries.

As emerging economies aspire to become truly modern and developed nations, one of the key challenges that these countries face is to address the issue of heavy dependence on mature economies. Progress towards self-dependence is typically measured by examining variety of indicators such as macroeconomic integration, stock market correlations, business cycles synchronization, etc. The recent global economic crisis and ongoing Eurozone turmoil have once again revived the interest of researchers and policy makers to investigate the emerging economies with regard to their self-reliance and decoupling potentials (see Claessens et al., 2010, Fidrmuca and Korhonen, 2010, Kose et al., 2012 and Lane and Milesi-Ferretti, 2011). The Global Competitiveness Report (2012–2013); see, World Economic Forum, 2012) acknowledges the impact of these crises on emerging countries. Further, due to fragile recovery of USA and troubled European countries, World Economic Outlook (IMF, 2012) also reports the underperformance of emerging economies in terms of achieving economic growth in 2012 compared to previous year. As a consequence, the gloomy economic outlook of emerging markets has attracted a great deal of attention of regulators and investors to examine their dynamic relationship with developed countries. In this light, the present study attempts to examine the stock market correlations between emerging and mature markets particularly the five most vulnerable countries of Euroarea popularly known as GIPSI3 (Greece, Ireland, Portugal, Spain and Italy). For emerging markets, we consider ‘BRIICKS’, which is a pool of seven economies viz., Brazil, Russia, India, Indonesia, China, South Korea and South Africa, that is considered as the hub of investment and portfolio diversification and sometimes treated as single homogenous financial asset class in the world. The initial version of this acronym was coined by Goldman Sachs as ‘BRIC’ which later extended by including Indonesia and South Korea in 2010 (see Global Development Horizon, 2011, World Bank). South Africa is included in 2011. However, the recently concluded meeting of BRICS held in New Delhi, India, did not include South Korea and Indonesia in the acronym. But in our study, we carry out the empirical analysis on its extended version as BRIICKS, by including those two economies due to their strong economic and trade relations with other emerging markets. The analysis of cross market correlations is of great significance with regard to the cross-country optimal portfolio allocation and risk management. In the literature, several studies have examined the process of time-varying cross market correlations especially at the time when the economy is completely in the grip of downturn caused by the rapid transmission of shocks originating from neighboring or far distant country (see Aloui et al., 2011, Cappiello et al., 2006, Kim et al., 2005, Marçal et al., 2011, Phylaktis and Ravazzolo, 2005 and Samarakoon, 2011). A significant increase in cross market correlations during the crisis period is referred as contagion which in general term defined as the spread of financial shocks from one country to others (see Ang and Bekaert, 1999, Chiang et al., 2007, Dooley and Hutchison, 2009, Forbes and Rigobon, 2002, Lessard, 1973, Longin and Solnik, 1995, Longin and Solnik, 2001, Solnik, 1974 and Syllignakis and Kouretas, 2011 etc.). The burgeoning literature on financial contagion indicates that the stock markets in crisis-hit countries normally indicate higher levels of interdependence, resulting in quick spread of financial shocks across markets within a short span of time (see Pericoli and Sbracia, 2003). The investigation of financial contagion is of great significance because of its damaging impact on global economy in relation to the strategic asset allocation, formulation of monetary as well as fiscal policy, asset pricing, financial risk management and multilateral organizations (see Forbes and Rigobon, 2002, Kaminsky and Reinhardt, 1999 and Longstaff, 2010, among others). In recent years, in the wake of recent US subprime and subsequent Eurozone disturbance, the examination of financial contagion across economies has become a fertile research terrain. In this study, we concentrate on Eurozone debt crisis by examining the financial contagion in BRIICKS economies by considering GIPSI countries as a source of contagion along with USA, UK and Japan as global factor. We also construct a GIPSI Crisis Index (henceforth, GCI) using GIPSI's stock market returns in order to reconfirm the evidence of contagion on BRIICKS markets. The present study makes a number of contributions to the existing literature. First, to the best of our knowledge this is the first study that examines the issue of financial contagion in an extended emerging market group, namely BRIICKS, investigating the contagion effects of Eurozone crisis. Second, we extend our analysis to a large set of emerging markets with substantial diversity by considering GIPSI as source of contagion and UK, USA and Japan economies as a global factor. Third, we employ DCC–GARCH model developed by Engle (2002) to investigate the pattern of short-run interdependence and examine the potential channels of contagion effects between GIPSI, Japan, UK and USA and BRIICKS markets. A final novel feature of this study is the thorough analysis of the possible implications that takes into account the changes in the correlation patterns across countries and time. It may be noted that this study does not cover the US subprime and earlier crisis periods as these events have already been examined by a large number of studies (see for details, Celık, 2012, Kenourgios and Padhi, 2012, Kenourgios et al., 2011 and Samarakoon, 2011). The Eurozone crisis is generally considered as a byproduct of US subprime owing to its strong contagion effects on Eurozone economies particularly on GIPSI countries, leading to erosion of investor confidence at an unprecedented speed. The spread of contagion started with Greece due to strong likelihood of default on its sovereign debt obligation in late 2009 and suddenly gripped the entire Europe and other economies across globe (see Kouretas and Vlamis, 2010 and Tamakoshi and Hamori, 2013). It is notable that though the crisis in GIPSI countries is the result of sovereign debt risk and not entirely originated from stock market but the spread of such risk has majorly been realized with the strong and persistent fall in stock prices across affected countries. Thus, one of the objectives of this study is to examine the contagion effects by analyzing dynamic conditional correlations between GIPSI and BRIICKS stock markets. Eurozone crisis of 2010 can broadly be divided into two categories. Firstly, a banking crisis which was an outcome of strong financial linkages with US banks and collapse of property markets in some EU countries and (ii) due to sovereign debt crisis linked with rising government deficits and debt levels over many years that was against the principles laid down in the Maastricht Treaty (see Blundell-Wignall and Patrick, 2011 and Missio and Watzka, 2011). Consequently, Ireland and Greece saw their economies on the verge of debt default which is also almost the case for Portugal, Spain and Italy.

This paper examines financial contagion in an emerging market setting by way of investigating the impact of GIPSI stock markets along with USA, UK and Japan on BRIICKS stock markets. After identifying the crisis period (October 19, 2009–January 31, 2012), we apply multivariate DCC–GARCH model to estimate the conditional correlations, the results indicate significant variation in conditional correlations during Eurozone crisis period. The analysis of dynamic conditional correlation provides substantial evidence on the existence of contagion effects due to herding behavior in the stock markets of BRIICKS. The statistical significance of adjusted correlation results elucidates the existence of financial contagion of GIPSI on BRIICKS stock markets, implying that the latter is more prone to contagion. Further, the combined effects of GIPSI markets on BRIICKS stock markets strongly substantiate the standalone effects. The empirical results indicate that among GIPSI countries, IRLD, ITALY and SPAIN appear to be the most contagious for BRIICKS markets compared to Greece. Among BRIICKS markets, with the exception of INDO and SKOR, all other markets confirm the contagion. In case of INDO and SKOR, there is a case of interdependence and not contagion. Based on the magnitude of correlation coefficients, it appears that the stock markets of SAF, RUSSIA and BRZ have felt the strong impact of Eurozone crisis. A major finding of this study is that there is a strong impact of structural changes on the cross market correlation structure, both in levels and variability. This is further confirmed by the fact that there is more or less synchronicity in the downgrades of sovereign credit rating between the crisis and foreign country during the examined crisis. The study reports several implications on the need to build an international financial architecture that will help the emerging market economies to minimize the contagion risk in the future. In order to realize this, it is needed that the BRIICKS market should promote policy research and international co-ordination. Establishment of pool of funds or a bank particularly for emerging markets will also help BRIICKS markets in minimizing the damaging implications of contagion effects. Creation of Sovereign Wealth Funds (SWFs) can play an important role in ensuring stock market stabilization for emerging markets. The study has strong implications for cross-country investments, as the portfolio diversification benefits of investing in these emerging markets appear to be little low when it is most desirable for them to be high, that is, in the crisis period. From policy makers' perspective, the findings of the study provide useful implications about the formulations of possible decoupling strategies to insulate the economy from contagious effects. For multilateral institutions, the study will provide important direction in undertaking co-ordinated rescue measures for vulnerable as well as contagious countries. The paper contributes to the literature by modeling and estimating the financial contagion in emerging markets context particularly the impact of Eurozone crisis on BRIICKS countries. The study also uses a novel approach to identify the crisis period by taking into account both statistical as well as major economic events with an appropriate sensitivity analysis. Future research in this direction could focus on the impact of GIPSI countries on BRIICKS markets by taking into account the regulatory norms, government austerity measures and major macroeconomic and financial factors on the severity of Eurozone crisis.