Contagion versus Interdependence: The Case of the BRIC Countries During the Subprime Crises
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Date
2014Metadata
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This chapter contributes to the empirical finance literature on modeling co-movement in financial markets by considering the case of the BRIC countries during the subprime crises. To overcome the problem of the time-varying behavior of stock market volatility when calculating the adjusted correlation coefficients, we propose the SWARCH—Adjusted correlation approach that combines the univariate ARCH regime-switching model (SWARCH) of Hamilton and Susmel (1994) and the adjusted correlation approach of Forbes and Rigobón (2002). The empirical results reveal the presence of high interdependence between the US and BRIC countries, mainly in high volatility periods. Moreover, empirical investigation shows the presence of a contagion phenomenon running from the US to Brazil.
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