Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.     

Regional spillovers across transitioning emerging and frontier equity markets: A multi-time scale wavelet analysis

The episodic wave of crises experienced across the global financial markets over the past two decades has raised questions surrounding the vulnerability of transitioning emerging and frontier equity markets to exogenous shocks. These markets, by design, have lacked the institutional or financial architecture supporting their capital base compared to more established markets. We make the initial attempt to examine four such stock markets (Saudi Arabia, UAE, South Africa and Israel). We perform multi-timescale analysis using wavelet-based time and frequency decompositions in order to investigate (i) whether the shocks transmitted were pure contagion or fundamental-based and (ii) also whether the dynamic evolution of stock market integration was mainly short-term or long-term. We find that prior to the 2008/09 US subprime crisis, the shocks generated pure contagion in contrast to the subprime crisis that reveals evidence supportive of fundamental-based contagion. Further, when exploring the dynamics of market integration, we find that integration strengthens over time as opposed to any immediate short-term outcome. This supports policies engendered to promote stock market resiliency and stability.     

What can wavelets unveil about the vulnerabilities of monetary integration? A tale of Eurozone stock markets

The study has two main objectives: (i) to investigate whether there is pure contagion or fundamental-based contagion/interdependence among the Eurozone equity markets (Germany, France, Italy, Spain and Netherlands), attributable to the shocks stemming from nine major crises around the world (ii) to investigate the evolution of market integration, whether mainly short-run or long-run. Wavelet decompositions, in both its discrete and continuous forms, are employed to unveil the multi-horizon nature of co-movements, volatility and lead–lag relationships. This is to unveil the path of linkages and the behavior underlying the transmission mechanism of financial shocks across major Eurozone stock markets. Evidence also supports the presence of common shocks whereby equity markets in Eurozone are significantly affected by episodic crisis events globally. Prior to the recent subprime crisis, contagion effects have generated short-term shocks that may potentially involve, among other factors, excessive channels. In stark contrast, the most recent US subprime crisis and EMU sovereign debt crisis reveal the evidence of fundamental-based contagion. We also find the increasing short-run and long-run stock market integration, driven by several stages of the establishment of EMU. Policy implications for regulators and investors are discussed in the context of continued monetary integration.     

Financial crises and dynamic linkages across international stock and currency markets

This paper investigates contagion across stock and currency markets of China, Eurozone, India, Japan and US during global financial crisis and Eurozone crisis. The crisis periods are selected using Markov-switching models for US and Eurozone markets. We, then, utilize the DCC-GARCH model to estimate conditional correlation among the assets and test for contagion/flight to quality effects during the crises. The results show significant contagion as well as flight to quality effects both across and within asset classes. We examine the impact of financial stress index on the correlation across markets and find that portfolio diversification benefits for equity markets may be non-existent.     

Markets contagion during financial crisis: A regime-switching approach

Within a Markov regime-switching VAR framework, we investigate the contagion effects among the stock market, real estate market, credit default market, and energy market covering the most recent financial crisis period when markets experience regime shifts. The results demonstrate that the watershed of regimes occurs around the start of the subprime crisis in 2007, after which the “risky” regime dominates the evolution of market chaos. During the financial crisis, excluding their own shocks, stock market shock and oil price shock are the main driving forces behind the credit default market and stock market variations, respectively. The energy market also appears to be more responsive to the stock market movements than the shocks originating from housing and credit markets. However, the impacts from the credit default market on the real estate market are not significant as expected.     

Evidence of cross-asset contagion in U.S. markets

This study examines evidence of cross-asset contagion among REIT, money, stock, bond, and currency markets in the US from 2006 to 2012, which covers the subprime and European sovereign debt crisis. We apply the Granger causality test and a vector auto-regression to examine the change of causality structure. Our results show that contagion exists from medium-term bond markets to equity markets; REIT, money markets and short-term bond markets show little evidence of cross-asset contagion with other markets; and the currency market shows high co-movement and contagion with equity markets. Our findings provide more rewarding asset reallocating strategies for the investors who invest in both bond and equity markets before a crisis to consider reallocating their portfolio into REIT and money markets to benefit from diversification during a crisis period.     

Financial contagion and volatility spillover: An exploration into Indian commodity derivative market

This study measures the extent of financial contagion in the Indian asset markets. In specific it shows the contagion in Indian commodity derivative market vis-à-vis bond, foreign exchange, gold, and stock markets. Subsequently, directional volatility spillover among these asset markets, have been examined. Applying DCC-MGARCH method on daily return of commodity future price index and other asset markets for the period 2006–16, time varying correlation between commodity and other assets are estimated. The degree of financial contagion in commodity derivative market is found to be the largest with stock market and least with the gold market. A generalized VAR based volatility spillover estimation shows that commodity and stock markets are net transmitters of volatility while bond, foreign exchange and gold markets are the net receivers of volatility. Volatility is transmitted to commodity market only from the stock market. Such volatility spillover is found to have time varying nature, showing higher volatility spillover during the Global Financial Crisis and during the period of large rupee depreciation in 2013–14. These results have significant implication for optimal portfolio choice.     

Spillover Effects of the 2008 Financial Crisis in Latin America Stock Markets

This paper examines the transmission of the 2008 US financial crisis to four Latin American stock markets using daily stock returns from 2006 to 2010, analyzing before, during and after the 2008 financial crisis. The empirical evidence presents a financial contagion by showing persistently higher and more volatile pair-wise conditional correlations during the crisis period. This indicates there are structural changes in mean and volatility of the correlation coefficients due to the 2008 financial crisis in Latin American markets. The results here could be useful in international portfolio diversification decision-making in Latin American region. In addition, the predicting the volatility in different markets could be a useful input for reducing financial instability in crisis episodes to policy makers.     

Liquidity in Asian markets: Intensity of Regional and global linkages

This study investigates cross-market linkages and the intensity of liquidity spillovers across nine Asian markets and five developed markets during 2006 to 2016. Further, the study examines the contagion caused by recent global financial crisis and its impact on the market liquidity. The direction and intensity of spillovers has been measured using forecast error variance decomposition method as suggested by Diebold and Yilmaz (2012). Among the developed markets, the United States, Germany and the United Kingdom significantly affect liquidity changes in Asian countries like India, China, Singapore and Japan. The results revels that on average, each Asian market receives 7% spillover from the global markets and 16% from regional markets. During the financial crisis, the average regional spillover increased to 20% and the global spillover increased to 11%. Thus, in Asia, the regional spillover is higher than the global spillover. Our results support the demand side hypothesis and suggest that it is the trade and portfolio investments that drive the liquidity spillovers. Our findings have potential implications for international investors, policy makers and market regulators.     

Contagion effects of the subprime crisis in the European NYSE Euronext markets

This paper presents three tests of contagion of the US subprime crisis to the European stock markets of the NYSE Euronext group. Copula models are used to analyse dependence structures between the US and the other stock markets in the sample, in the pre-crisis and in the subprime crisis periods. The first test assesses the existence of contagion on the relevant stock markets’ indices, the second checks the homogeneity of contagion intensities, and the third compares contagion in financial and in industrial sectors’ indices. Results suggest that contagion exists, and is equally felt, in most stock markets and that investors anticipated a spreading of the financial crisis to the indices of industrial sectors, long before such dissemination was observable in the real economy.     

How globally contagious was the recent US real estate market crisis? Evidence based on a new contagion test

This paper utilizes a new contagion test based on case-resampling bootstrap technique to investigate whether there is any contagion effect in the interaction of the US real estate market with those of Australia, Japan and the UK arising out of the recent US real estate crisis or subprime crisis. Contrary to expectations, it is found that the relationship of the US market with the other markets following the US real estate market crisis cannot be characterized as one with contagion effect. Its relationship with the other markets is rather characterized by dependency behavior that prevails regardless whether the markets are under distress or not.     

Intraday bidirectional volatility spillover across international stock markets: does the global financial crisis matter?

This article studies volatility spillover between the US and the three largest European stock markets (Frankfurt, London and Paris) around the time of the recent Subprime crisis. In order to investigate the impact of the latter, we break our sample down into two sub-periods: a pre-crisis period and a post-crisis period, using a structural break test that has the advantage of endogenously testing for further breaks in the data. Unlike previous studies that have frequently investigated this issue using low frequency data, our article makes use of intraday data. Accordingly, using Threshold generalized autoregressive conditional heteroscedasticity (GARCH) model estimations, we find weak evidence of volatility transmission between the two regions before the Subprime crisis. However, during the post-crisis period, we record returns and volatility spillover from US to European markets and vice versa at different times of the trading day, indicating that the two regions became more dependent during the recent Subprime crisis, a finding that supports the contagion hypothesis between the US and European stock markets.     

Strong contagion with weak spillovers

In this paper, we develop an explanation for why events in one market may trigger similar events in other markets, even though at first sight the markets appear to be only weakly related. We allow for escape dynamics in each market, and show that an escape in one market is contagious because it more than doubles the probability of a similar escape in another market. We claim that contagion is strong since escapes become highly synchronised across markets. Spillovers are weak because the instantaneous spillover of events from one market to another is small. To illustrate our result, we demonstrate how a currency crisis may be contagious with only weak links between countries. Other examples where weak spillovers would create strong contagion are various models of monetary policy, imperfect competition and endogenous growth.     

The source of global stock market risk: A viewpoint of economic policy uncertainty

This study explores the effect of economic policy uncertainty (EPU) in four countries or regions (China, Japan, Europe, and the United States) on the contagion risk of investments in the global stock market. The stock returns of 22 stock markets worldwide are analyzed to determine which region’s EPU exhibits the greatest effect on regional systematic risk in the global stock market and on volatility risk in individual stock markets. First, all of the samples, the markets of different continents and the spillover indices of the developed and emerging markets, are calculated to observe the dynamic correlation among these markets with the aim of quantifying regional systematic risk and further examining the contagion risk effect of EPU. The results indicate the following: EPU in China is the most influential, and its contagion risk spreads to different regional markets, except for Europe; the effect of EPU in the United States is inferior to that in China; EPU in Japan merely influences contagion risk in emerging markets; contagion risk in European markets is not influenced by the four EPU indices; and EPU in Europe is not influenced by contagion risk in the global stock market. However, according to the volatility risk in each market, the EPU in Europe and China respectively influence Asian countries and European countries the most. These results may be attributable to the extremely high trade dependence among these countries because the performance of international enterprises is mainly determined by the economic policies of their trading partners.     

Volatility transmission between Islamic and conventional equity markets: evidence from causality-in-variance test

This study examines whether a volatility/risk transmission exists between the Dow Jones Islamic stock and three conventional stock markets for the United States, Europe and Asia during the pre- and the in- and post-2008 crisis periods. It also explores the volatility spillover dynamics between those markets and US Monetary policy, oil prices, global financial risk and uncertainty factors. The recently developed Hafner and Herwartz (2006)’s causality-in-variance test provides evidence of risk transfers between these seemingly different equity markets, indicating a contagion between them during the full sample and the subperiods. The volatility structure of these markets is dominated by short-run volatility in the first period and by high long-run volatility in the second period. The volatility impulse response analysis indicates a similar volatility transmission pattern although it is characterized by a more volatile and short-lived structure in the second period. It also appears that the Islamic equity market responds to shocks from the risk factors and not from the oil price and the US economic policy uncertainty index during both periods.     

Assessing downside and upside risk spillovers across conventional and socially responsible stock markets

Since the aftermath of the recent global financial crisis, socially responsible (SR) investments have become an alternative form of conventional finance, giving rise to further systemic risk between conventional and SR stock markets. In this paper, we assess this risk transmission using Value at Risk (VaR) modeling for the US, Europe and the Asia-Pacific region, over the period covering January 2004–December 2016. We find that socially responsible stock markets exhibit less risk than do conventional markets in terms of the risk hedging properties induced by the SR screening. Second, contributions to systemic risk vary across market phases and return distribution levels, with a larger contribution and spillover effect during the recent global financial crisis. For example, at the downside of the distribution (CoVaR at 5%), the conventional European index shows the highest contribution to the world market’s systemic risk, while the US stock market shows the highest contribution at the upside of the distribution (CoVaR at 95%). This finding is justified by the difference in the risk aversion of investors that varies with the market state as well as the disparities in the development of SR markets.     

FINANCIAL CRISES AND INTERNATIONAL STOCK MARKET VOLATILITY TRANSMISSION

This paper examines the interplay between stock market returns and their volatility, focusing on the Asian and global financial crises of 1997–98 and 2008–09 for Australia, Singapore, the UK, and the US. We use a multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model and weekly data (January 1992–June 2009). Based on the results obtained from the mean return equations, we could not find any significant impact on returns arising from the Asian crisis and more recent global financial crises across these four markets. However, both crises significantly increased the stock return volatilities across all of the four markets. Not surprisingly, it is also found that the US stock market is the most crucial market impacting on the volatilities of smaller economies such as Australia. Our results provide evidence of own and cross ARCH and GARCH effects among all four markets, suggesting the existence of significant volatility and cross volatility spillovers across all four markets. A high degree of time‐varying co‐volatility among these markets indicates that investors will be highly unlikely to benefit from diversifying their financial portfolio by acquiring stocks within these four countries only.     

Impacts of China's crash on Asia-Pacific financial integration: Volatility interdependence,information transmission and market co-movement

This paper examines the price and volatility dynamics between China and major stock markets in the Asia-Pacific, investigating the effects of the Chinese stock market crash (2015–2016) for the first time. Employing the Bayesian VAR and BEKK GARCH, we observe that price and volatility spillover behaviours are different during the stable and stress periods. Particularly, price spillovers from China to other regional markets are more significant during a bullish period, showing that ‘good news’ emanating from China has strong impacts on its neighbours during better market condition. In the turbulent period, we observe strong shock spillover effects and enhanced volatility spillovers from China to most Asia-Pacific stock markets. This is because China, as an important trading partner and strategic financial centre shows to exert significant influence on the Asia-Pacific region through various economic channels. We also find that the Asia-Pacific stock markets spill over their shocks to China during the crisis, indicating that China is becoming more integrated with the regional financial markets.     

Which way does water flow? An econometric analysis of the global price integration of water stocks

Around US$600 billion of investment is desperately needed to address forecasted huge shortages in water supply globally. A number of worldwide investors – so-called water funds – have started to take up this challenge. For these global water investors, knowledge about the extent of integration between the water sectors of financial markets is highly important. According to international portfolio diversification theory, the less (more) integrated markets are, the more (less) benefits there are from international diversification. In this study, we investigate the extent and manner of interdependence among the US, European and Asian water sector of the equity markets based on Vector Autoregression (VAR), Granger causality and impulse response analyses. We find that world water stock market prices are indeed significantly interdependent although this interdependence varies across time periods. Each market quickly responds to shocks from each other and completes its response within 3 days. Hence, for water investors, international diversification that is undertaken just within the water sector will not be beneficial. The result also implies that there is the risk of crossmarket contagion – that is, price volatility spill over across water sectors of different financial markets, and therefore, water authorities in one market should take cognisance of events in other markets.     

Eurozone crisis and BRIICKS stock markets: Contagion or market interdependence?

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.