"Contagion" between the emerging and developed capital markets: empirical evidence and reflections on the international portfolio diversification

Else Monteiro Nogueira () and Wagner Moura Lamounier ()
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Else Monteiro Nogueira: Banco Santander
Wagner Moura Lamounier: Cepead e Cepcon, UFMG

Brazilian Review of Finance, 2008, vol. 6, issue 2, 267-286

Abstract: In this research, we analyzed the short and long term interdependence and relationship between the stock indices of the major emerging capital markets and the major developed markets for the period 1995-2005. The aim was to verify the existence and the dynamics of the “contagion” between the markets, or if the occurrence of crises and changes in the behavior of a market would have impacts on the behavior of the others. In the development of the work, we applied the methodology of the Vector Error Correction Model (VEC). We found the presence of cointegrating relationships between the markets analyzed, but was able to see that, despite being cointegrated markets, investors could bene t from international diversification of portfolios. That’s because the speed of adjustment of the long-term ratio of cointegration between the markets was low for the period analyzed. Accordingly, investors would have the opportunity to reduce risk by diversifying their portfolios. Keywords: Cointegration; VEC; emerging markets; developed markets; international diversification.

Keywords: Cointegration; VEC; emerging markets; developed markets; international diversification (search for similar items in EconPapers)
JEL-codes: C32 E32 G11 G15 (search for similar items in EconPapers)
Date: 2008
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