Testing for contagion from oil and developed markets to emerging markets: An empirical analysis using systemic risk parameter
Vol. 13, No 2, 2020
Edgardo Cayón
CESA Business School, Colombia ecayon@cesa.edu.co |
Testing for contagion from oil and developed markets to emerging markets: An empirical analysis using systemic risk parameter |
Julio Sarmiento
Pontificia Universidad Javeriana, Colombia sarmien@javeriana.edu.co
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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). |
Received: May, 2019 1st Revision: December, 2019 Accepted: May, 2020 |
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DOI: 10.14254/2071-8330.2020/13-2/7
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JEL Classification: G1, G15, G17 |
Keywords: oil, contagion, emerging markets, systemic risk |