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

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

DOI: 10.14254/2071-8330.2020/13-2/7

JEL Classification: G1, G15, G17

Keywords: oil, contagion, emerging markets, systemic risk