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Information linkages among emerging equity markets—an empirical study

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Abstract

In this paper, we examine the price discovery and volatility spillovers among equity markets of eight emerging market economies (EMEs)—Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey—from January 2003 to July 2014, covering the 2007–2009 global financial crisis (GFC). The analysis is conducted for pre-crisis, crisis and post-crisis periods. The results of price discovery indicate that Brazil leads in pre-crisis period while South Africa leads during crisis period. No single market is dominant in the post-crisis period and across the full sample period as well. Dynamic cointegration test largely confirms the findings from the static Johansen’s cointegration test. Employing asymmetric dynamic conditional correlation and BEKK-GARCH models, we find that volatility spillovers reduced among the sample markets over time. The empirical results suggest that the information linkages among the sample EMEs’ equity markets weakened during the GFC and did not revert to stable period levels after the crisis. The findings have implications for policy makers and investors.

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Notes

  1. ‘BRIC’ in 2006 became ‘BRICS’ in 2011 after including South Africa.

  2. According to the IMF’s World Economic Outlook of April 2014, emerging market risks have increased, highlighting market concern about emerging market fundamentals.

  3. Referred to as the ‘Goldilocks era’ by Goldman Sachs, whereby a Goldilocks economy is one that is not so hot that it causes inflation and not so cold that it causes a recession. For instance, the US economy of the mid- to late-1990s was considered a Goldilocks economy because it was “not too hot, not too cold, but just right.”

  4. Other groupings include Asian Economic Community (AEC), Gulf Cooperation Council (GCC), Shanghai Cooperation Organization (SCO) and USAN (Union of South American Nations).

  5. IBSA stands for India, Brazil and South Africa. CIVETS comprises of Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. MINT stands for Mexico, Indonesia, Nigeria and Turkey. The NEXT-11 countries include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam.

  6. Financial contagion literature suggests correlations among stock markets increase during a crisis period. Forbes and Rigobon (2002) define increase in cross-market linkages following an economic shock in one country, as ‘shift-contagion.’ Distinguishing between contagion and interdependence, they write that while the former relates to cross-market linkages being fundamentally different after a shock to one market, the latter implies no significant changes in relationships despite shocks hitting the recipient market.

  7. As per World Development Indicators, World Bank 2012, http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS/countries?order=wbapi_data_value_2012+wbapi_data_value+wbapi_data_value-last&sort=desc.

  8. The Guardian (http://www.theguardian.com/business/2012/aug/07/credit-crunch-boom-bust-timeline) and the BBC (http://news.bbc.co.uk/2/hi/business/7521250.stm) timelines corroborate this.

  9. Results of stationarity testing are available upon request.

  10. According to Fung et al. (2008), a wider window of three years is better to capture the long-run relationship in the cointegration measure.

  11. The Foreign Ministers of the BRIC countries first met on the sidelines of the 61st General Assembly of the United Nations on September 23, 2006. South Africa was invited to attend the 3rd BRICS Summit in Sanya on April 14, 2011.

  12. South Africa was ranked 53rd (out of 148 countries) in the Global Competitiveness Index of September 2013 by World Economic Forum.

  13. In 2011, India was the 11th largest trading partner of China, 7th largest export destination for China and 16th largest exporter to China.

  14. Insight on ‘Emerging Markets: As the Tide Goes Out,’ Investment Strategy Group in the Investment Management Division of Goldman Sachs, December 2013 (http://www.goldmansachs.com/what-we-do/investment-management/private-wealth-management/intellectual-capital/isg-insight-2013.pdf).

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Authors and Affiliations

  1. Department of Financial Studies, University of Delhi, South Campus, Benito Juarez Road, New Delhi, 110 021, India

    Sanjay Sehgal & Payal Jain

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  1. Sanjay Sehgal
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  2. Payal Jain
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Correspondence to Payal Jain.

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Sehgal, S., Jain, P. Information linkages among emerging equity markets—an empirical study. Decision 44, 15–38 (2017). https://doi.org/10.1007/s40622-016-0144-2

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