Testing for contagion from oil and developed markets to emerging markets: An empirical analysis using systemic risk parameter

Information
Title: Testing for contagion from oil and developed markets to emerging markets: An empirical analysis using systemic risk parameter
Issue: Vol. 13, No 2, 2020
Published date: 06-2020 (print) / 06-2020 (online)
Journal: Journal of International Studies
ISSN: 2071-8330, eISSN: 2306-3483
Authors: Edgardo Cayón
CESA Business School, Colombia

Julio Sarmiento
Pontificia Universidad Javeriana, Colombia
Keywords: oil, contagion, emerging markets, systemic risk
DOI: 10.14254/2071-8330.2020/13-2/7
DOAJ: https://doaj.org/article/22ea84acffc449cd95e52b2486d10386
Language: English
Pages: 98-108 (11)
JEL classification: G10, G15, G17
Website: https://www.jois.eu/?605,en_testing-for-contagion-from-oil-and-developed-markets-to-emerging-markets-an-empirical-analysis-using-systemic-risk-parameter
File https://www.jois.eu/files/7_8_830_Cayon.pdf
Licenses:
The authors are thankful to CESA Business School for covering the cost of the open source fee.
Abstract

This paper analyses the volatility transmission from changes in prices in oil and developed stock markets to emerging markets. We test for volatility contagion from these two factors while allowing for interaction between them in order to account for diversification effects using the M-GARCH framework in a traditional two-factor market model. We find evidence that for all the periods under observation the covariance between developed markets and oil prices is negative. This negative covariance leads to a diversification effect, which lowers the impact of developed market prices on the systemic risk of emerging markets and gives support for the decoupling hypothesis concerning emerging market volatility during the beginning of the global financial crisis (GFC).

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