Contagion or Decoupling? Evidence from Emerging Stock Markets

Lumengo Bonga-Bonga and Zinzile Lorna Ndiweni
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Zinzile Lorna Ndiweni: School of Economics, University of Johannesburg, Johannesburg 2006, South Africa

Risks, 2025, vol. 13, issue 9, 1-20

Abstract: This paper uses a statistical test based on entropy theory to propose a new way to distinguish between interdependence, contagion, and the decoupling hypotheses in the context of shock transmission and spillover. Applying the proposed approach, the three hypotheses are examined when measuring the extent of shock spillover between selected developed and emerging markets during idiosyncratic crisis and normal periods. The US and EU are identified as developed economies. However, emerging markets are classified by regions to determine whether their responses to shocks from developed economies are homogeneous or heterogeneous depending on the region to which they belong. The suggested entropy test is based on the conditional correlations obtained from an asymmetric dynamic conditional correlation generalized autoregressive conditional heteroscedasticity (A-DCC GARCH) model. In addition to economic methods, statistical methods based on the regime-switching technique are used to date the different phases of the global financial crisis (GFC) and the European sovereign debt crisis (ESDC). Our findings show that all emerging markets decoupled from developed economies in at least one of the phases of the two crises. These findings provide valuable insights for policymakers, investors, and asset managers for portfolio allocation and financial regulations.

Keywords: contagion; interdependence; decoupling; A-DCC-GARCH; entropy test; emerging markets; advanced markets (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Contagion or decoupling? Evidence from emerging stock markets (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:13:y:2025:i:9:p:165-:d:1737862

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