Pure vs. fundamental contagion

Nur Ain Shahrier, Zaheer Anwer and M. Ishaq Bhatti

International Review of Economics & Finance, 2025, vol. 103, issue C

Abstract: We examine the nature of currencies contagions across 17 emerging economies during Covid-19 and Russia-Ukraine war for period 03 September 2019 to 06 December 2024. We utilize Time-Varying Parameter Vector Autoregression (TVP-VAR) framework as well as Wavelet framework covering time, frequency, and amplitude dimensions. Our TVP-VAR results reveal four major contagion episodes within the sample period, with varying dominance of pure and fundamentals-based contagion linked to events like COVID-19, the Russia–Ukraine war, and global inflation. Commodity-related uncertainty like Oil and Gold volatility amplifies contagion, while broad geopolitical threats may reduce it. The Chinese Yuan evolves from a passive receiver to a dominant transmitter of shocks post-2021, reflecting China's growing financial influence. Conversely, the Russian Ruble shifts from a contagion transmitter to a receiver after 2022 due to geopolitical isolation and sanctions. Continuous Wavelet Transform results for individual currencies show the existence of distinct short-term (pure contagion) and long-term (fundamental contagion) volatility patterns, with currencies like the Brazilian Real and Russian Ruble showing persistent high volatility, while others, such as the Turkish Lira and Egyptian Pound, exhibited minimal effects. Wavelet Coherence results reveal insightful co-movement dynamics, with the Chinese Yuan and Russian Ruble emerging as leading currencies influencing regional and global systems. Short-term spillovers dominated, but instances of fundamental contagion underscored deeper structural interdependencies, reflecting shifts in global economic alignments. The results stand robust to Partial Wavelet Coherence approach and Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity. We report important implications for policymakers and investors.

Keywords: Exchange rate; Currency contagion; Spillover; Emerging markets; Covid-19; Russia-Ukraine war; Sustainable economic growth; SDG8 (search for similar items in EconPapers)
JEL-codes: F31 F65 G15 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:103:y:2025:i:c:s1059056025007555

DOI: 10.1016/j.iref.2025.104592

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