Financial Contagion: Impact Of US Financial Crisis On Emerging Financial Market

The study aims to investigate the impact of global financial crisis on Emerging Market Economies. The financial crisis transmits to Emerging economies through two Channels- financial channel and trade channel. To analyze the financial channel that is concerned with the stock market performance; the data of stock market returns of US stock returns is analyzed with the stock returns of emerging market economies namely(China, India, Brazil, Russia and Pakistan). Moreover, in this study the data of exchange rate is analyzed to study the effect on trade channel. Exchange rate is the most vital variable; if trade of an economy declines it affects the foreign reserves and ultimately the foreign exchange market. For the analysis, we used various econometric techniques on the data set. First, we study the Spillover effect of US financial market over the financial markets of Emerging economies like China, India, Brazil, Russia and Pakistan. Empirical analysis indicates a significant effect from US financial market to the Emerging financial markets. To achieve the objective, Econometrics techniques have been used for our study which takes Vector Autoregression(VAR). The study suggests that mean return of US financial market has a significant impact on the Emerging financial markets. In the second stage, this study investigates the contagion effect of global financial crisis on exchange rate of emerging economies. For the analysis we have used daily exchange rate data compared to US dollar for five emerging economies(China, India, Russia, Brazil and Pakistan) covering the period from 1st January 2008 to 31 st December 2010. The econometric techniques such as Vector Autoregressive method, Regression analysis were employed and dummy variables were used to capture the effect of these financial crisis. Then we analyze the dynamic short-run and long-run relationship between the Stock returns and Exchange rate; the study identifies the impact of exogenous shocks and we have employed various econometric techniques to like multivariate granger causality test, Cointegration analysis and Vector autoregession model. Daily data has been taken for the analysis starting from January 1, 2007 to September 30, 2011 which has been divided into three parts(before, during and after) financial crisis period. This study also examines the spillover effect of US Stock returns on emerging markets Stock returns(China, India and Pakistan) and the effect of volatility in US stock on the emerging stock market particularly during the period of global financial crisis. For the analysis, daily stock returns of these markets from the period of 1st January 2007 to 30 th September 2011 have been used. The data has been divided into parts. The econometric technique such as EGARCH model is applied for examination.The findings based on impulse response functions demonstrates that shock in US financial market has an impact on the returns of stocks of Emerging financial markets. We find a regression between our variables; the long term Cointegration among exchange rates and short run significance among various economies has been found in our analysis. The results show a long-term Cointegration among the variables in all cases whereas, in short-term during the crisis period it shows that Global stock returns have a significant impact on China and Pakistan but not on their Exchange rates and also it has significant impact on India and Brazilian Exchange rate but not on their stock returns. The results show a weak spillover effect on BSE whereas mean spillover for SSE is insignificant but it shows a volatility spillover from US financial market to China’s financial market. In case of KSE returns we find a spillover effect from the US stock returns to KSE stock returns.